Pound Sterling Eyes More Downside On Firm BoE Rate Cut Prospects

 Photo by Colin Watts on Unsplash 

  • The Pound Sterling drops to near 1.2300 as the BoE is expected to start reducing interest rates from August.
  • The S&P Global/CIPS UK preliminary PMI data for April will provide guidance on the economic outlook.
  • Two BoE policymakers are lined up to speak as investors seek clues about the interest-rate outlook.

The Pound Sterling (GBP) remains vulnerable at around 1.2300 in Monday’s London session. The GBP/USD is under pressure as the US Dollar (USD) holds strength on expectations that the US Federal Reserve (Fed) will maintain interest rates at their current levels for longer. 

United States Consumer Price Index (CPI) has turned out hotter-than-expected in the first three months of the year and the country’s economic outlook is strong, suggesting that the current interest rate framework is appropriate. 

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, is slightly positive above the crucial support of 106.00. Meanwhile, investors will shift focus to the core Personal Consumption Expenditure Price Index (PCE) data for March, which will be published on Friday. The monthly core PCE Price Index is estimated to grow steadily by 0.3%. Annually, the underlying inflation data is expected to soften to 2.6% from 2.8% in February.

On the United Kingdom front, investors await the S&P Global/CIPS preliminary PMI data for April, which will be published at 08:30 GMT. The Manufacturing PMI is expected to expand steadily by 50.3. The Services PMI is estimated to have declined slightly to 53.0 from 53.1.  

Daily digest market movers: Pound Sterling edges down while US Dollar exhibits strength

  • The Pound Sterling refreshes a five-month low near the round-level support of 1.2300 as investors see the Bank of England (BoE) pivoting to interest rate cuts sooner than the Fed. Last week, BoE Deputy Governor Dave Ramsden said that United Kingdom inflation will decline faster than expected and will return to the 2% target in May.
  • Dave Ramsden said: “Over the last few months, I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics," Reuters reported. He added that inflation might prove weaker than BoE’s latest projections.
  • Ramsden’s soft guidance on the inflation outlook has prompted expectations that the BoE will start reducing interest rates earlier than previously expected. LSEG's (BOEWATCH) now prices 28 basis points (bps) of rate cuts in August and 56 bps in December versus 22 bps and 51 bps, respectively, at Friday's close, Reuters reported.
  • Market expectations for the BoE’s May policy meeting will be guided by commentaries from policymakers, as inflation data for the same month will be released after the interest rate decision. In Tuesday’s session, the speeches from BoE policymakers Jonathan Haskel and Huw Pill will be in focus. 
  • In March’s monetary policy meeting, Haskel, who remained a hawk, surprisingly voted for keeping interest rates unchanged at 5.25%. In early April, Haskel commented that rate cuts should be "a long way off." He added that the decline in the headline inflation is good news but the BoE cares more about the persistent and theerlying inflation, the Financial Times reported. High inflation in the UK economy has been majorly driven by persistent inflation in the service sector, which is fuelled by strong wage growth. In March, the annual Service inflation decelerated slightly to 6.0% from 6.1%. 

Technical Analysis: Pound Sterling trades close to five-month low near 1.2300

(Click on image to enlarge)

The Pound Sterling printed a fresh five-month low near 1.2300 on Monday. The GBP/USD pair extends its losing spell for fourth trading session on Tuesday as a breakdown of the Head and Shoulder chart pattern formed on a daily timeframe has weakened the near-term outlook.

Declining 20-day and 50-day Exponential Moving Averages (EMAs) at 1.2525 and 1.2600, respectively, indicate that the long-term outlook is bearish.

The 14-period Relative Strength Index (RSI) oscillates in the range of 20.00-40.00, indicating a strong bearish momentum. 

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