Pound Sterling refreshes two-year high at 1.3300 after BoE keeps rates steady

• The Pound Sterling surges above 1.3250 against the US Dollar following the Fed’s large rate cut and expectations of further policy easing. 
• Investors focus on the BoE policy meeting, with markets expecting the UK central bank to leave interest rates unchanged at 5%.
• UK’s stubborn services inflation in August strengthened the case for the BoE keeping interest rates steady.

The Pound Sterling (GBP) strengthens against its major peers on Thursday after the Bank of England’s (BoE) monetary policy announcement. The BoE left interest rates unchanged at 5%, as expected, as the United Kingdom (UK) core Consumer Price Index (CPI) data for August came in higher than expected.

Out of the nine Monetary Policy Committee (MPC) members, BoE external member Swati Dhingra seldom voted for cutting interest rates for the second consecutive time. The rest of the MPC supported keeping rates at their current levels. Investors were expecting that two MPC members would support for a dovish policy decision.

The UK core inflation – which excludes volatile items – accelerated to 3.6%,  higher than what markets expected. Services inflation, a closely watched indicator by BoE officials, rose sharply to 5.6% from 5.2% in July.

Currently, financial market participants expect that the BoE will cut interest rates one more time in any of its remaining monetary policy meetings. 

Daily digest market movers: Pound Sterling tests 1.3300 against US Dollar

• The Pound Sterling climbs to near 1.3300 against the US Dollar as the latter falls sharply amid growing speculation that the policy-easing cycle from the Federal Reserve (Fed) will be deeper than previously expected. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retreats from a five-day high of 101.50.
• The Fed delivered a 50-basis points (bp) interest rate cut on Wednesday, which signaled that the central bank is confident that inflation is declining to the bank’s target of 2% and is increasingly concerned over deteriorating labor market conditions. Fed Chair Jerome Powell ruled out fears of the United States (US) economy entering a recession: “I don’t see anything in the economy right now that suggests that the likelihood of a recession,” he said, adding that “you see growth at a solid rate, you see inflation coming down, and you see a labor market that’s still at very solid levels.”
• Fed officials anticipate the federal funds rate heading to 4.4% by the end of the year, suggesting that the Fed will cut interest rates by 50 bps more. According to the CME FedWatch tool, the probability for the Fed reducing interest rates by 25 bps to 4.50%-4.75% in November is at 65.6%, while the rest favors a 50-bps rate cut.
• Analysts at Citi see the Fed reducing interest rates by 50 bps again in November. “Powell noted a number of times that today’s 50bp cut is a ‘commitment’ to not get behind the curve, which suggests the bar for further large rate reductions is very low. We continue to see risks as balanced toward a more rapid softening of labor market data and a more aggressive pace of rate cuts.”
• In Thursday’s US session, investors will focus on the Initial Jobless Claims data for the week ending September 13. Individuals claiming jobless benefits for the first time are expected to have remained steady at 230K.

Technical Analysis: Pound Sterling aims to sustain above 1.3300

The Pound Sterling approaches 1.3300 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3100. Earlier, 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) stands above 60.00. A fresh round of bullish momentum could occur if the oscillator sustains around this level.

Looking up, the Cable will face resistance near the August 27 high of 1.3266 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.