• Sterling falls below 1.3150 against the US dollar on high US core PCE inflation.
• Declining market expectations for substantial interest rate cuts by the Fed supported the US dollar.
• The BoE’s period of monetary policy easing is expected to be slower than that of its main rivals.

The British Pound (GBP) continues its two-day losing streak and records a recent daily low below 1.3150 against the United States Dollar (USD) in Friday’s North American session. The GBP/USD pair is holding steady as the US Dollar surges following the release of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for July, which came in slower than expected. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is jumping above 101.50.

The PCE inflation report showed that core inflation, which excludes volatile food and energy prices, rose steadily by 2.6%, slower than the 2.6% estimate. On a month-on-month basis, core inflation rose by 0.2%, in line with expectations.

Historically, the influence of PCE inflation data has been high, as it is the Federal Reserve’s (Fed’s) preferred inflation measure for making interest rate decisions. This time, the influence of core inflation data was expected to remain constrained on market speculation about the Fed’s path of rate cuts this year.

With growing confidence that inflation is on track to decline sustainably toward the Fed’s 2% target, officials are now worried about growing risks to the strength of the U.S. labor market. “The balance of risks to our mandate has shifted,” Fed Chairman Jerome Powell said last week in a speech at a symposium in Jackson Hole. Comments from some other Fed policymakers also suggest the central bank will not hesitate to aggressively cut its key lending rates if there is further evidence of a pointed deterioration in the labor market.

Financial market participants now expect the Fed to almost certainly begin cutting rates in September. However, signs of stickiness in price pressures from the PCE inflation data have reduced bets supporting the Fed to aggressively begin its easing cycle. The probability of a 50-basis-point (bps) rate cut has fallen to 30.5% from 36% a week ago, according to the CME FedWatch tool.

Daily market factors review: Sterling to be hit by speculation on BoE interest rate path

• Sterling is showing a mixed performance against its main rivals on Friday. However, the broader outlook for the British currency remains sturdy, with investors gaining confidence that the Bank of England’s (BoE) easing cycle will be gradual over the rest of the year compared to its central bank peers.
• According to money market price data, the BoE is expected to cut interest rates by 40 basis points in the remaining year, while the European Central Bank (ECB) is expected to do the same by 65 basis points, Reuters reported. In the same time frame, the Fed is estimated to cut its key lending rate by 100 basis points, according to the CME FedWatch tool.
• The sturdy speculation about a shallow easing cycle by the BoE comes amid an improved economic outlook in the United Kingdom (UK). In July, the International Monetary Fund (IMF) raised its gross domestic product (GDP) target for this year to 0.7%. The fiscal plans of the recent Labour government led by Prime Minister Keir Starmer, which include planning reforms and closer trade ties with the European Union, will boost economic activity, Goldman Sachs analysts said.

Technical Analysis: Sterling Falls Below 1.3150

Sterling extends correction below 1.3150 against the US dollar. GBP/USD is lower after failing to reach 1.3200. However, the near-term appeal of GBP/USD remains sturdy as it maintains a breakout from the Rising Channel chart pattern on the weekly chart. If bullish momentum continues, Cable is expected to rise towards psychological resistance at 1.3500 and the February 4, 2022 high at 1.3640 after breaking a recent two-and-a-half-year high at 1.3266 against the US dollar.

A rising 20-week exponential moving average (EMA) around 1.3000 indicates a sturdy uptrend.

The 14-period Relative Strength Index (RSI) is hovering in a bullish range of 60.00-80.00, suggesting sturdy upside momentum. However, it is still close to overbought levels around 70.00, raising the possibility of a pullback correction. On the other hand, the psychological level of 1.3000 will be a key support for the GBP bulls.