- Pound Sterling faces a sell-off as market sentiment turns volatile.
- BoE Ramsden wants to see how long price pressures will remain sticky.
- The US Dollar rises ahead of US core PCE price index data.
In Wednesday’s European session, the Pound Sterling (GBP) experiences a dip amid ongoing market volatility ahead of crucial data on the United States core Personal Consumption Expenditure price index (PCE) for January. Despite anticipations that the Bank of England (BoE) will implement interest rate cuts later than the Federal Reserve (Fed), the GBP/USD pair is on a downward trend. This is noteworthy as higher interest rates typically attract increased foreign capital inflows, supporting the Pound Sterling.
Investors foresee the BoE adopting a shift in monetary policy stance later than its counterparts, attributing this delay to the persistent price pressures in the United Kingdom’s economy, fueled by substantial wage growth – a positive factor for the Sterling. BoE policymakers caution that the rate at which Average Earnings are slowing down is only half of what is necessary to achieve price stability.
Looking ahead, market expectations for BoE rate cuts will continue to steer the direction of the Pound Sterling. Stock investors are optimistic about potential BoE interest rate reductions starting from August, as this could bolster the broader stock market. This period may coincide with a resurgence in inflation after a decline to 2%, as projected by the BoE in its latest monetary policy statement.
Daily Digest Market Movers: Pound Sterling drops on subdued market sentiment
The Pound Sterling takes a sharp downturn after failing to reclaim the resistance level at 1.2700, reflecting a cautious market sentiment. Investors are adopting a wait-and-see approach in anticipation of the crucial United States core PCE price index data for January, scheduled for release on Thursday. This pivotal inflation data is expected to offer insights into the potential timing of interest rate reductions by the Federal Reserve (Fed).
Market projections indicate a slowdown in underlying inflation data to 2.8%, down from December’s 2.9% on a year-on-year basis. Meanwhile, the US Dollar Index (DXY), gauging the Greenback against major currencies, climbs to the critical resistance level of 104.00.
On the domestic front, the Pound Sterling’s trajectory will be influenced by market expectations regarding rate cuts by the Bank of England. BoE policymakers currently show less inclination to lower key lending rates, seeking additional evidence that inflation will align with the 2% target.
During the last monetary policy meeting, BoE Deputy Governor Dave Ramsden, who advocated for maintaining interest rates at 5.25%, emphasized the importance of assessing the duration of persistent inflation. Ramsden indicated that the duration of inflation persistence will play a role in determining the maintenance of interest rates at 5.25%.
Persistent price pressures in the UK economy stem from robust wage growth and service inflation. While key inflation indicators have seen notable declines, the pace of this descent remains inconsistent, with inflation moving towards the targeted 2% mark.
Technical Analysis: Pound Sterling faces stiff resistance near 1.2700
The Pound Sterling experiences a significant decline after encountering strong resistance around the 1.2700 level. The GBP/USD pair consistently meets obstacles near the downward-sloping boundary of a Descending Triangle pattern, discernible on the daily time frame. The upper boundary is drawn from the December 28 high at 1.2827, while the horizontal support stems from the December 13 low around 1.2500.
The Descending Triangle pattern reflects a state of uncertainty among market participants, leaning slightly towards a bearish inclination due to the formation of lower highs and a flat lower boundary.
The pair is currently moving lower towards the 20 and 50-day Exponential Moving Averages (EMAs), situated around 1.2630. Concurrently, the 14-period Relative Strength Index (RSI) remains confined within the 40.00-60.00 range, indicating a notable contraction in volatility.
