• Sterling falls to 1.2740 against USD as Fed signals only one rate cut this year.
• Fed policymakers have said they want to see inflation decline for several months before considering interest rate cuts.
• Steady wage growth in the UK has raised concerns about persistent inflation in the services sector.

The pound sterling (GBP) weakens further to 1.2740 against the US dollar (USD) during Friday’s session, while the latter remains stable. The U.S. Dollar Index (DXY), which tracks the value of the dollar against six major currencies, extends its gain to 105.40. The USD index rises for a second straight day as the Federal Reserve’s (Fed) hawkish stance on the interest rate outlook outweighed the impact of the tender United States Consumer Price Index (CPI) and Producer Price Index (PPI) reports per May.

The U.S. PPI report released on Thursday showed monthly headline PPI fell 0.2% on delicate gasoline prices and core producer inflation, which excludes volatile food and energy prices, was unchanged.

Weaker inflation reports among consumers and producers suggest that the headline reading of the Consumer Expenditures Price Index (PCE), the Fed’s preferred measure of inflation, would also show easing inflation pressures. This strengthened expectations for earlier Fed interest rate cuts. According to the CME FedWatch Tool, 30-day Fed Funds futures price data shows that investors believe there is a 65% chance of a decision to cut interest rates in September. The probability has increased significantly from the 50.5% recorded a week ago.

On Wednesday, the Fed signaled only one interest rate cut this year compared to the previous projection of three, after leaving interest rates unchanged in the range of 5.25%-5.50%. Policymakers have scaled back the number of rate cuts in the latest projections amid concerns that progress on disinflation has slowed. At a news conference after the interest rate decision, Fed Chair Jerome Powell said the tender inflation report for May was encouraging, but officials wanted price pressures to subside for months to build confidence in interest rate cuts. Powell added that policymakers would respond quickly to interest rate cuts if labor market conditions begin to improve.

Daily market update: Pound sterling weakens due to BoE result

• Sterling has been underperforming against North American and other European currencies, but is upbeat against most Asia-Pacific currencies during Friday’s session in London. GBP’s short-term outlook is expected to remain uncertain as investors focus on the Bank of England’s (BoE) monetary policy meeting on Thursday.
• The BoE is widely expected to keep interest rates steady at 5.25%. Therefore, investors will mainly focus on the number of decision-makers who will vote for the decision to cut interest rates. At the May meeting, BoE deputy governor Dave Ramsden joined policymakers Swati Dhingra in voting to cut interest rates by 25 basis points (bps) to 5.0%. At a press conference, BoE Governor Andrew Bailey confirmed significant progress in bringing inflation down to 2%, but noted: “We are not yet at the point where we can lower the base rate,” EuroNews reported.
• Financial markets are currently divided between August and September meetings on when the BoE could start cutting interest rates. Before the BoE results, investors will focus on the CPI report for May, which will be published on Wednesday. UK headline inflation appears to be on track to return to the desired rate of 2%. However, inflation in the services sector, driven by wage increases, continues to be a grave concern for policymakers.
• The latest UK jobs report showed that average earnings, a measure of wage inflation, rose steadily in the three months to April. The rate of wage growth is much higher than needed to bring inflation down to the BoE target.

Technical analysis: Sterling falls below 78.6% Fibo support

Sterling falls to a two-day low near 1.2740 against the US dollar. GBP/USD is facing selling pressure as it tries to clear the 78.6% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low of 1.2300) at 1.2770.

Cable price has fallen near the 20-day exponential moving average (EMA), which is hovering around 1.2730. Meanwhile, the rising 50-day EMA near 1.2670 suggests that the near-term trend is still bullish.

The 14-period Relative Strength Index (RSI) is falling back to the 40.00-60.00 range, indicating that the upside momentum has died down.