Pound Sterling gains as UK economy returns to growth, US PPI in focus

• The Pound Sterling recovers sharply against its major peers after the UK ONS reported robust factory data and expected GDP growth in August.
• Traders expect the BoE to cut interest rates in at least one of its two policy meetings remaining this year.
• Investors await the US PPI data for fresh cues on the Fed’s interest rate outlook.

The Pound Sterling (GBP) edges higher against the US Dollar (USD) in Friday's London session. The GBP/USD pair rises to near 1.3080, but the outlook is cautious as the Greenback remains firm. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near 103.00.

The US Dollar clings to gains as hotter-than-expected United States (US) Consumer Price Index (CPI) data for September kept the scope of the Federal Reserve (Fed) to reduce interest rates by 50 basis points (bps) again in the November meeting off the table.

Thursday’s CPI report showed that the annual core inflation – which excludes volatile food and energy prices – accelerated to 3.3%. The headline inflation rose by 2.4%, faster than estimates of 2.3% but slower than the August print of 2.5%.

However, traders are confident that the Fed will cut interest rates next month but at a gradual pace of 25 bps, according to the CME FedWatch tool. Also, a majority of Fed policymakers see more rate cuts as appropriate.

On Thursday, New York Fed Bank President John Williams said at an event at Binghamton University, "Based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time."

On the economic data front, investors will focus on the US Producer Price Index (PPI) data for September, which will be published at 12:30 GMT. The annual headline PPI is estimated to have decelerated to 1.6% from 1.7% in August. On the contrary, the core PPI – which strips off volatile food and energy prices – is expected to have accelerated at a faster pace to 2.7% from 2.4% in August.

Daily digest market movers: Pound Sterling rises ahead of US PPI

• The Pound Sterling outperforms its major peers on Friday after the release of the United Kingdom (UK) data. The British currency gains as the monthly factory data came in better than expected, and the Gross Domestic Product (GDP) grew expectedly in August.
• The Office for National Statistics (ONS) reported that the economy returned to growth after remaining flat in the last two months. The economy expanded by 0.2%, as expected. Month-on-month Manufacturing and Industrial Production rose at a robust pace of 1.1% and 0.5%, respectively, while economists expected them to grow by 0.2%.
• Annually, Manufacturing and Industrial Production contracted by 0.3% and 1.6%, respectively. However, the pace at which both economic data declined was slower than in July.
• Upbeat monthly factory data and an expected GDP growth have improved the UK economic outlook. This will also provide some relief to the Labor government, which is all set to announce its first fiscal budget later this month.
• Going forward, the next trigger for the Pound Sterling will be the UK Employment data for the three months ending August and the Consumer Price Index (CPI) report for September, which will be published on Tuesday and Wednesday, respectively. The economic data will significantly influence market expectations for Bank of England's (BoE) likely interest rate action in November. Financial market participants expect the BoE to cut interest rates only once in the remaining two policy meetings this year.

Technical Analysis: Pound Sterling wobbles near 50-day EMA

The Pound Sterling recovers from the monthly low of 1.3010 against the US Dollar. However, the outlook of the GBP/USD pair remains vulnerable as it has stabilized below the upward-sloping trendline plotted from the 28 December 2023 high of 1.2827.

The near-term trend of the Cable has become bearish as it trades below the 20- and 50-day Exponential Moving Averages (EMAs), which trade around 1.3167 and 1.3106, respectively.

The 14-day Relative Strength Index (RSI) declines to near 40.00. More downside would appear if the momentum oscillator falls below the above-mentioned level.

Looking up, the round-level resistance of 1.3100 and the 20-day EMA near 1.3170 will be a major barricade for Pound Sterling bulls. On the downside, the Pound Sterling would find support near the psychological figure of 1.3000.