- Even though the UK’s core and service CPI figures eased up in August, the pound sterling remains fairly strong compared to its peers.
- Market players are looking to see if the Bank of England will maintain interest rates during Thursday’s meeting.
- The Federal Reserve is almost certain to announce a rate cut at 18:00 GMT.
On Wednesday, the pound sterling (GBP) showed considerable strength against major currencies following the release of the UK Consumer Price Index (CPI) data for August. Despite a report from the National Statistics Office (ONS) indicating that service inflation increased moderately to 4.7% from 5.0% in July, the currency held firm.
Some inflationary pressures in the services sector could challenge the pound, particularly if the market anticipates no further interest rate reductions from the Bank of England (BOE) for the rest of the year. The BOE’s Monetary Policy Committee closely monitors service sector inflation when making interest rate decisions.
Core CPI, which excludes fluctuating items like food and energy, dropped from 3.8% in July to 3.6%, as expected.
In terms of overall inflation, the headline figure rose steadily to 3.8%, slightly under the 3.9% forecast. Each month saw a growth expectation of 0.3%, quicker than July’s 0.1%.
The significant upcoming event for the pound is the BOE’s interest rate announcement on Thursday, where it is widely anticipated that the central bank will hold borrowing rates steady at 4%.
Pound Sterling Set to Gain Against the US Dollar Ahead of Fed Announcement
- On Wednesday, Pound Sterling is expected to maintain gains near 1.3640 against the US dollar (USD) throughout the European trading session, largely because of expectations surrounding the Federal Reserve’s interest rate decision later in the day.
- As of this writing, the US Dollar Index (DXY) is struggling, hovering close to a two-month low of 96.60 recorded on Tuesday.
- Traders currently estimate a 96% chance that the Fed will reduce interest rates by 25 basis points, pushing them to a range between 4.00% and 4.25%, while some are hopeful for a larger cut of 50 basis points.
- The Fed’s upcoming summary of economic forecasts, which will include insights from Chairman Jerome Powell on inflation and the labor market, is also eagerly anticipated by market players. Analysts from Morgan Stanley predict that the Fed will continue to cut interest rates by 25 basis points in its remaining meetings this year, indicating a potential range of 3.50%-3.75% by 2025.
- Concerns regarding the US labor market and the waning impact of tariffs on inflation bolster these predictions. Chairman Powell expressed concerns about negative labor market impacts during his comments at the Jackson Hole Symposium in August, suggesting that if the Fed delays policy changes, they might have to act swiftly.
- Attention will also be on Stephen Milan, a newly added member of the pricing committee, as investors speculate whether his views align with US President Donald Trump’s economic policies.
- Meanwhile, Fed Governor Lisa Cook is expected to participate in the monetary policy announcement after her legal challenges were dismissed.
Technical Insights: Pound Sterling Exceeds 20-Day EMA
The pound has dipped to nearly 1.3640 against the US dollar on Wednesday, but the broader trend for the GBP/USD pair remains upbeat. Following a breakout from a rising triangle formation seen on Tuesday, the currency is trading above the 20-day exponential moving average (EMA) at approximately 1.3535.
The 14-day relative strength index (RSI) is currently above 60.00, indicating potential upward momentum. If it stays above that threshold, there could be more gains ahead.
Looking to support levels, the low of 1.3140 from August 1st is significant, while the peak from July around 1.3800 serves as a key resistance point.
