Pound Sterling slumps against US Dollar despite firmer Fed rate-cut prospects

• The Pound Sterling faces selling pressure near 1.2800 against the USD even though traders raise Fed rate-cut bets for September.
• A weak US factory PMI report boosts the possibility of the Fed pivoting to rate cuts.
• UK’s persistent service inflation remains a major concern for BoE policymakers.

The Pound Sterling (GBP) corrects from the round-level resistance of 1.2800 against the US Dollar in Tuesday’s London session but remains broadly firm. The GBP/USD pair posted a fresh two-month high earlier in the day due to a sharp decline in the US Dollar (USD), which was triggered by growing speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.

Market expectations for the Fed returning to policy normalisation strengthened after the weaker-than-expected United States (US) ISM Manufacturing PMI report for May indicated that the growth outlook of the world’s largest economy appears to be losing momentum. According to the PMI report, US manufacturing activity contracted for a second straight month as “demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions.” 

The Manufacturing PMI, which gauges the health of factory activity, came in at 48.7, lower than the consensus of 49.6 and the former release of 49.2. The report also indicated a bleak demand environment and easing inflation prospects. The New Orders Index, which reflects the demand outlook, declined to 45.4 from the prior reading of 49.1. The Prices Paid Index, which gauges chances in input prices, dropped to 57.0 from the consensus of 60.0 and the prior reading of 60.9. Decelerating input price growth results in a slower increase in selling prices, which eases fears of inflation remaining persistent.

Daily digest market movers: Pound Sterling drops as US Dollar gains ground

• The Pound Sterling weakens against the US Dollar as the latter steadies in Tuesday’s European session after Monday’s sell-off. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is slightly up but trades close to an almost two-month low near 104.00. The near-term outlook of the GBP/USD pair remains firm as traders increasingly price in that the Fed will lower interest rates in September.
• The CME FedWatch tool shows that traders see a 60% chance for interest rates declining from their current levels in September. The probability has improved significantly from 45.8% registered a week ago. The market speculation for Fed rate cuts is expected to remain volatile this week as investors gear up for major economic data releases such as the ISM Services PMI and Nonfarm Payrolls (NFP) data for May, which will be published on Wednesday and Friday, respectively.
• In today’s session, investors will focus on the JOLTS Job Openings data for April, which will be published at 14:00 GMT. US employers are estimated to have posted 8.34 million jobs, lower than the prior reading of 8.49 million. Lower job postings suggest that the labor market is losing strength.
• In the United Kingdom (UK), market speculation for Bank of England (BoE) rate cuts isn’t likely to move much Pound Sterling due to the absence of top-tier economic events and the fact that BoE officials aren’t speaking until after the upcoming elections. Currently, financial markets expect that the BoE will start reducing interest rates in the August meeting. UK’s annual headline Consumer Price Index (CPI) has come down significantly to 2.3% while persistent service inflation is still a major concern for BoE policymakers.

Technical Analysis: Pound Sterling aims to stabilize above 78.6% Fibo retracement

The Pound Sterling falls from the round-level resistance of 1.2800 against the US Dollar. The GBP/USD pair’s appeal has strengthened as it appears to sustain above the 78.6% Fibonacci retracement support at 1.2770 (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300).

The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, indicating a strong uptrend.

The 14-period Relative Strength Index (RSI) has shifted into the 40.00-60.00 range, suggesting that the momentum has leaned toward the upside.