Pound Sterling corrects while BoE less-dovish bets keeps outlook firm

• The Pound Sterling faces pressure near 1.3400 against the US Dollar, while the latter's outlook remains vulnerable.
• BoE Governor Andrew Bailey sees a gradual decline in interest rates.
• Investors await the US PCE inflation data for August on Friday for fresh clues on the Fed’s interest rate prospects.

The Pound Sterling (GBP) drops sharply from the crucial resistance of 1.3400 against the US Dollar (USD) in Wednesday’s North American session. The GBP/USD pair falls as the US Dollar shows a minor recovery from the yearly low. However, the near-term outlook of the US Dollar remains vulnerable on expectations that the Federal Reserve (Fed) could deliver one more big interest rate cut in one of the two policy meetings remaining this year.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, delivers a mild recovery from 100.20. Last week, the Fed started the policy-easing cycle with a 50-basis points (bps) reduction in interest rates to the range of 4.75%-5.00%, with the aim of reviving labor market strength. The Fed also gained confidence that inflation will sustainably return to the bank’s target of 2%. Out of the 12 members-led Federal Open Market Committee (FOMC), only Fed Governor Michelle Bowman supported a gradual beginning of the rate-cut cycle with a standard 25 bps cut.

According to the CME FedWatch tool, the central bank is expected to reduce its key borrowing rates further by 75 bps in the remainder of the year, suggesting that there will be one 50 bps and one 25 bps rate cut. The 30-day Federal fund futures pricing data shows that the probability of the Fed reducing interest rates by a double dose of 50 bps in November has increased to 59% from 37% a week ago.

Going forward, investors will shift focus to the United States (US) core Personal Consumption Expenditures Price Index (PCE) data for August, the Fed’s preferred inflation gauge, which will be published on Friday. Economists estimate the core annual inflation measure to have accelerated to 2.7% from 2.6% in July.

Daily digest market movers: Pound Sterling falls from 1.3400 against US Dollar

• The Pound Sterling exhibits a mixed performance against its major peers on Wednesday. The outlook of the British currency remains firm as investors expect that the Bank of England (BoE) will lower interest rates gradually. BoE Governor Andrew Bailey said in an interview with Kent Messenger newspaper on Tuesday, "I do think the path for interest rates will be downwards, gradually.”
• The comments from Bailey suggested that he is confident about inflation sustainably returning to the bank’s target of 2%. When asked about where interest rates will settle, Bailey didn’t provide a specific neutral rate but assured that he did not expect them to return to historic lows as seen in times of pandemic.
• In the United Kingdom (UK), the annual headline inflation hovered near the bank’s target of 2% in the last three months. However, high inflation in the services sector has remained a major concern for BoE policymakers, for which they closely track the Service Consumer Price Index (CPI), which increased to 5.6% in August from 5.2% in July.
• In the European session, BoE policymaker Megan Greene also emphasized the need to cut interest rates gradually. When asked about the inflation outlook, Mega Greene commented that inflation indicators, showing price pressures remaining persistent, are moving in the right direction.

Technical Analysis: Pound Sterling faces resistance near 1.3400

The Pound Sterling falls after facing resistance near 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as all short-to-long-term Exponential Moving Averages (EMAs) are 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) shifts 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 psychological level of 1.3000 emerges as crucial support.