Pound Sterling refreshes weekly low on dismal market sentiment

• The Pound Sterling faces pressure as the appeal for risk-sensitive assets fade.
• The UK economy grew as expected in January but fears of recession remain high.
• Going forward, investors will shift focus to the UK Inflation data for fresh guidance.

The Pound Sterling (GBP) declines in Friday’s European session as dismal market sentiment dampens the appeal of risk-sensitive assets. The GBP/USD pair refreshes weekly low near 1.2730 as the US Dollar strengthens on increasing expectations for the Federal Reserve (Fed), keeping interest rates unchanged in the range of 5.25%-5.50% in the June policy meeting.

The Cable is broadly under pressure due to expectations that the Fed's first rate cut, a move widely expected for markets as interest rates remain high for more than two years, could be pushed back further into the summer. This would align the time frame of the Fed’s rate cut decision with that of the Bank of England (BoE), which is expected to start reducing interest rates from the August policy meeting.

Uncertainty over the United Kingdom's economic outlook may not allow BoE policymakers to keep interest rates higher for longer. The UK economy entered a technical recession in the second half of 2023, and despite January’s slight uptick, there is no solid indication that the worst is over for them.

Daily Digest Market Movers: Pound Sterling drops while USD Index looks set for bullish weekly closing

• The Pound Sterling drops to 1.2730 as the market sentiment remains downbeat amid fears that the Federal Reserve would be reluctant to cut interest rates in the June policy meeting due to a string of stubborn inflation indicators.
• The US Dollar and bond yields soared after the United States Producer Price Index (PPI) data for February turned out more stubborn than expected. Producers tend to raise the prices of goods and services at their factory gates when they experience supply chain disruptions or anticipate higher consumer spending. In February,  higher gasoline and food prices boosted producer prices. The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, rose to 103.40 after the data release.
• This week, the Pound Sterling remains on the back foot. The 0.2% UK economic growth in January, which was expected by markets, fails to offset the impact of weak Employment data for the three months ending January, also released earlier this week. The UK economy has returned to growth after contracting in the second half of 2023. However, the economy needs to report an expansion as a whole in the first quarter to prove that the technical recession was shallow.
• Going forward, the major trigger for the Pound Sterling will be the UK’s February inflation data, which will be published on Wednesday, a day before the Bank of England interest-rate decision. The impact of slowing wage growth, which has been feeding service inflation, could be visible in the Consumer Price Index (CPI) data. Stubborn service inflation has been a key driver of high inflationary pressures.
• The inflation data will influence market expectations for BoE rate cuts, which point to the August policy meeting. According to a Reuters poll, the central bank will start cutting borrowing costs in the third quarter, although 40% of economists saw an earlier trim. 
• Meanwhile, a quarterly survey conducted by the BoE showed that public inflation expectations for a 12-month period remain unchanged at 2.8%. Inflation expectations for five years' time ease to 3.1% vs. 3.2% in Nov.

Technical Analysis: Pound Sterling refreshes weekly low near 1.2730 

The Pound Sterling prints a fresh weekly low near 1.2730 against the US Dollar. The GBP/USD pair corrects significantly from its seven-month high near 1.2900. The pair is an inch higher than the 20-day Exponential Moving Average (EMA), which trades around 1.2725.

The 14-period Relative Strength Index (RSI) has dropped into the 40.00-60.00 range, indicating that the bullish momentum has faded.