Sterling gains ahead of Fed Powell, BoE Greene speeches

• Sterling is clinging to gains near 1.3400 against the US dollar as the latter weakens after weak inflation data.
• A slight acceleration in US core PCE inflation suggests the Fed’s fight against inflation is not yet over.
• Investors await Fed Powell and BoE Greene speech.

The British pound (GBP) continues to hold on to gains near resistance at the 1.3400 round level against the US dollar (USD) in the London session on Monday. The outlook for GBP/USD remains firm as the greenback trades near annual lows after data released on Friday showed US inflation fell further in August. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is nearing key support at 100.20.

The Consumer Price Index (PCE) report showed annual inflation rose 2.2 percent, slower than estimates of 2.3 percent and July’s reading of 2.5 percent. This easing of price pressures is likely welcome news for Federal Reserve (Fed) Chairman Jerome Powell and his colleagues. However, a victory over inflation is still far from over as the core PCE price index – which excludes volatile food and energy prices and is the Federal Reserve’s (Fed) preferred measure of inflation – accelerated to 2.7 % from the previous release of 2.6%.

Declining US inflation has raised market expectations for more interest rate cuts, but appears insufficient to cement another 50 basis point (bps) cut as the Fed is now more alert to rising risks in the labor market and an economic slowdown.

This week, investors will focus on a number of US economic data, such as the ISM Manufacturing and Services PMI, ADP Employment and Nonfarm Payrolls (NFP) data for September and the JOLTS Job Openings data for August, which will provide fresh clues on the current health of the labor market and the economy.

In Monday’s session, investors will pay attention to Jerome Powell’s speech at 17:00 GMT, which is expected to provide new interest rate guidance. Powell’s comment could indicate whether the Fed will cut interest rates again with a larger-than-usual 50 bps cut, as it did on Sept. 18, or move to a gradual 25 bps cut.

Daily market reasons: Sterling underperforms Asia-Pacific peers

• The pound is showing strength against its major peers, excluding Asia-Pacific currencies, at the start of the week. The British currency is gaining as investors expect the pace and depth of interest rate cuts by the Bank of England (BoE) to be slower than those of other central banks in the Group of Seven (G-7) countries.
• Asia-Pacific currencies such as the Australian dollar (AUD) and New Zealand dollar (NZD) are showing strong performance after China’s cabinet announced on Sunday that it will focus on resolving outstanding economic issues and strive to meet annual economic development targets and social, Reuters reported. The likelihood of an improvement in China’s economic outlook enhances the appeal of Asia-Pacific currencies, given that their nations are China’s important trading partners.
• Financial market participants expect the BoE to cut interest rates once by 25 bps at one of the other two meetings this year. For fresh cues, investors will focus on the 20:10 GMT speech by BoE Megan Greene, who is an external member of the nine-member Monetary Policy Committee (MPC). Greene voted to leave interest rates unchanged at the September 19 and August 1 monetary policy meetings.
• On the economic front, revised Q2 Gross Domestic Product (GDP) estimates showed the United Kingdom (UK) economy grew by 0.5%, slower than the flash indication of 0.6% on a quarterly basis. Annual GDP growth in the second quarter also fell to 0.7 percent from the preliminary estimate of 0.9 percent.

Technical Analysis: Sterling turns sideways near 1.3400

Sterling is consolidating near key resistance at 1.3400 against the US dollar in European trading hours. The short-term outlook for GBP/USD remains firm as the 20-day exponential moving average (EMA) near 1.3250 is sloping higher.

In early September, the cable consolidated after recovering from a corrective move to near the trend line drawn from December 28, 2023 high of 1.2828, from where it made a sharp rally after a breakout of 21 August.

The 14-day Relative Strength Index (RSI) remains above 60.00, suggesting bullish active momentum.

Looking to the upside, the cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be key support for GBP bulls.