Pound Sterling posts fresh two-week low with US core PCE inflation in focus

The Pound Sterling prints a fresh two-week low at 1.2845 against the US Dollar on Friday as investors turn cautious ahead of the US core PCE Price index.
The BoE is expected to cut interest rates next week.
Robust US Q2 GDP growth has improved the economic outlook.

The Pound Sterling (GBP) exhibits a steady performance against its major peers on Friday. The British currency is expected to remain on the sidelines as investors shift focus to the Bank of England’s (BoE) monetary policy meeting, which is scheduled for Thursday.

A Reuters poll on July 18-24 showed that more than 80% of economists said the BoE would announce a rate-cut decision in its August meeting for the first time in more than four years. The BoE will ditch its restrictive monetary policy framework, which it has been maintaining since the pandemic hit global markets. The BoE is expected to reduce its key borrowing rates by 25 basis points (bps) to 5% in the August meeting. However, traders see a 46% chance of the BoE pivoting to policy-normalization. It appears that the absence of BoE officials’ endorsement for rate cuts has limited BoE rate-cut expectations.

Despite the return of the annual headline Consumer Price Index (CPI) in the United Kingdom (UK) to the central bank’s target of 2%, BoE policymakers hesitate to support interest rate cuts amid worries about strong wage growth momentum that has been resulting in sticky price pressures in the service sector.

Also, signs of wage growth easing ahead remain absent due to the shortage of labor in the United Kingdom. The UK labor market has faced a shortage of workers for a long period due to voluntary retirements by individuals and the Brexit event.

Meanwhile, the UK’s economic prospects remain firm due to expanding activities in manufacturing as well as the service sector and political stability after Prime Minister Keir Starmer’s outright victory in parliamentary elections.

Daily digest market movers: Pound Sterling will be influenced by BoE rate-cut expectations

The Pound Sterling posts a fresh two-week low at 1.2845 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair faces sharp selling pressure amid uncertainty ahead of the United States (US) core Personal Consumption Expenditures price index (PCE) data for June, which will be published at 12:30 GMT.
The core PCE inflation data, the Federal Reserve’s (Fed) preferred inflation measure, is estimated to have decelerated to 2.5% year-over-year from May’s reading of 2.6%, with monthly price pressures growing steadily by 0.1%.
The scenario in which the underlying inflation declines expectedly or at a faster pace would be unfavorable for the US Dollar as it will cement expectations of early interest rate cuts by the Federal Reserve. On the contrary, hot inflation numbers would force traders to pare early rate-cut bets. According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the central bank will start reducing interest rates in September.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance near 104.30. The US Dollar failed to capitalize on robust US Q2 Gross Domestic Product (GDP) growth as the impact was offset by subsiding price pressures. The US economy expanded at a robust pace of 2.8% in the second quarter, double the 1.4% growth recorded in the first quarter. Still, speculation for Fed rate cuts in September remained intact as GDP Price Index decelerated at a slower-than-expected pace to 2.3%.

Technical Analysis: Pound Sterling remains below 1.2900

The Pound Sterling remains on the back foot against the US Dollar after sliding below the crucial support of 1.2900. The GBP/USD pair trades in a Rising Channel pattern on a daily timeframe, in which each pullback move is considered as a buying opportunity by market participants. The Cable holds the key 20-day Exponential Moving Average (EMA), which trades around 1.2866.

The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded. However, the bullish bias remains intact.

On the upside, a two-year high near 1.3140 will be a key resistance zone for the Cable.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

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