Pound Sterling strengthens ahead of busy US data week, Fed Powell speech

• The Pound Sterling climbs above 1.3400 against the US Dollar as the latter weakens after soft inflation data.
• A slight acceleration in the US core PCE inflation suggests that the Fed’s battle against inflation is not over yet.
• Investors await Fed Powell and BoE Greene’s speech.

The Pound Sterling (GBP) jumps the round-level resistance of 1.3400 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair surges as the Greenback falls to near yearly lows, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declining to near the key support of 100.20. The US Dollar weakens after data released on Friday showed that US inflation decelerated further in August.

The Personal Consumption Expenditure Price Index (PCE) report showed that the annual inflation grew by 2.2%, slower than estimates of 2.3% and July’s reading of 2.5%. This slowdown in price pressures is likely welcome news for Federal Reserve (Fed) Chair Jerome Powell and his colleagues. However, a victory over inflation is still not a given as the core PCE price index – which excludes volatile food and energy prices and is the Federal Reserve’s (Fed) preferred inflation measure – accelerated to 2.7% from the prior release of 2.6%.

The decline in US inflation has increased market expectations for more interest rate cuts, but it appears insufficient to cement another 50 basis points (bps) decline as the Fed is now more vigilant to growing labor market risks and an economic slowdown.

This week, investors will focus on a slew of US economic data such as the ISM Manufacturing and Services PMIs, ADP Employment, and Nonfarm Payrolls (NFP) data for September and JOLTS Job Openings data for August, which will provide fresh cues on the current health of job market and the economy.

In Monday’s session, investors will pay attention to Jerome Powell’s speech at 17:00 GMT, who is expected to provide fresh interest rate guidance. Powell’s commentary could indicate whether the Fed will cut interest rates again by a larger-than-usual cut of 50 bps, as it did on September 18, or will shift to a gradual reduction of 25 bps.

Daily digest market movers: Pound Sterling outperforms US Dollar ahead of Fed Powell's speech

• The Pound Sterling exhibits strength against its major peers at the start of the week. The British currency gains as investors expect the pace and the depth of interest rate cuts by the Bank of England (BoE) to be lower than that of other central banks from Group of Seven (G-7) nations.
• Financial market participants expect the BoE to cut interest rates one more time by 25 bps in one of the remaining two meetings this year. For fresh cues, investors will focus on BoE Megan Greene’s speech at 20:10 GMT, who is an external member of the nine-member-led Monetary Policy Committee (MPC). Greene voted to leave interest rates unchanged in the monetary policy meetings on September 19 and August 1.
• On the economic front, revised estimates of Q2 Gross Domestic Product (GDP) showed that the United Kingdom (UK) economy grew by 0.5%, slower than the flash reading of 0.6% on a quarterly basis. The annual Q2 GDP growth also came in lower at 0.7% from the preliminary estimate of 0.9%.

Technical Analysis: Pound Sterling revisits 1.3400

The Pound Sterling gains further above the key resistance of 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as the 20-day Exponential Moving Average (EMA) near 1.3250 is sloping higher.

Earlier in September, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21. 

The 14-day Relative Strength Index (RSI) remains above 60.00, suggesting an active bullish momentum. 

Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be the key support for Pound Sterling bulls.