Sterling remains fragile as the Fed looks set to cut rates gradually

• Sterling remains vulnerable near 1.3060 against the US dollar as investors expect the Fed to take a gradual rate cut approach.
• The Fed’s Williams expects the central bank to be in no rush to cut interest rates quickly.
• Investors await US CPI and UK GDP for fresh interest rate outlook.

The British pound (GBP) is struggling to gain ground near a three-week low of 1.3060 against the US dollar (USD) on Tuesday. However, the short-term outlook for GBP/USD remains fragile as the US dollar clings to gains near a fresh seven-week high, with the US Dollar Index (DXY) trading around 102.50. The greenback is strengthening as market participants are not pricing in another 50 basis point (bps) higher than usual interest rate cut from the Federal Reserve (Fed) in November.

The Fed kicked off its policy easing cycle with a 50bps interest rate cut in September, focusing mainly on reviving labor market strength after gaining confidence that inflation would sustainably return to the bank’s 2% target .

Market participants anticipated that the Fed would aggressively extend the rate cut cycle. However, speculation was dashed by upbeat United States (US) non-farm payrolls (NFP) data for September, which showed strong employment growth, a lower unemployment rate and an increase in salary increase.

Although market speculation for big Fed interest rate cuts has subsided, the central bank is expected to remain on track to ease monetary policy further. Meanwhile, comments by New York Fed President John Williams in an interview with the Financial Times on Tuesday indicated he favors a 25 bps rate cut and is in no rush to cut interest rates quickly as the more recent data on employment increased. its confidence in consumer spending and economic growth.

Going forward, investors will focus on US consumer price index (CPI) data for September, which will be released on Thursday.

Daily Market Reasons: Sterling is trading cautiously on geopolitical tensions

• Sterling is trading cautiously against its major peers on Tuesday as investors focus on Middle East tensions driving market sentiment. In Tuesday’s session in Asia, Iranian Foreign Minister Abbas Araqchi warned Israel that the nation would face strong retaliation if it tried to attack its infrastructure.
• The British currency is also under pressure as traders adjust market expectations for the Bank of England’s (BoE) interest rate outlook. Market participants expect the BoE to cut interest rates again in November. BoE interest rate cut prospects rose sharply after comments last week from governor Andrew Bailey indicated the central bank could cut interest rates aggressively if price pressures eased further.
• Inflation in the United Kingdom (UK) remained sticky due to persistent price pressures in the services sector amid stronger wage growth. Annual UK services inflation rose to 5.6% in August from 5.2% in July.
• This week, investors will pay close attention to monthly Gross Domestic Product (GDP) and factory data for August, which will be released on Friday. The data will provide new clues about current economic health.

Technical Analysis: Sterling is trading below the 50-day EMA

Sterling is trading mid-range on Monday as investors focus on US CPI data for September. GBP/USD is expected to remain on the back foot as it fails to hold the 50-day exponential moving average (EMA), which is trading around 1.3100. The cable weakened after falling below the uptrend line from the December 28, 2023 high of 1.2827.

The 14-day Relative Strength Index (RSI) is falling to near 40.00. More disadvantages would occur if the pulse oscillator drops below the level mentioned above.

Looking to the upside, resistance at the round level of 1.3100 and 20-day EMA near 1.3202 will be a major barricade for GBP bulls. On the downside, the pair would find support near the psychological figure of 1.3000.