Pound Sterling recovers on improved market mood, US Core PCE Inflation in focus

• Pound Sterling rebounds as market mood improves ahead of US core PCE price index data.
• High UK inflation would allow BoE policymakers to maintain a hawkish tone on interest rates.
• The US Dollar aims to advance further on robust US GDP growth.

The Pound Sterling (GBP) bounces back strongly as focus shifts to the interest rate decisions by the Bank of England (BoE) and the Federal Reserve (Fed) next week. Both central banks are widely anticipated to keep the monetary policy unchanged for the fourth straight time but guidance on interest rates for the entirety of 2024 will be keenly watched.

BoE policymakers are expected to refrain from rate-cut discussions as the United Kingdom economy is still experiencing significantly higher inflationary pressures than the US. There, however, policymakers could provide some cues about future interest rate-cuts. The Summary of Economic Projections (SEP) published after the last Fed meeting showed members on average predicting three rate cuts in 2024.

Before the Fed’s interest rate decision, market participants will focus on the core Personal Consumption Expenditure (PCE) price index data for December, which will be published at 13:30 GMT. Fed policymakers could emphasize on rate-cuts after the first-half of 2024 if the underlying inflation data remains stubbornly high.

Daily Digest Market Movers: Pound Sterling rebounds while US Dollar falls back

• Pound Sterling finds significant bids as investors shift focus towards the interest rate decision by the Bank of England, which will be announced next week.
• The BoE is widely anticipated to maintain interest rates steady at 5.25% for the fourth time in a row.
• Investors will keenly watch whether BoE policymakers will follow the Fed or the European Central Bank (ECB) and start discussing  making costs to interest rates.
• Unlike the ECB and the Fed, BoE policymakers have not offered any timeframe or projections for rate cuts amid high inflationary pressures.
• The core inflation in the United Kingdom economy is at 5.1%, significantly far from the desired rate of 2%, and higher than the US and Eurozone (3.9% and 3.4% respectively).
• This could mean the BoE to be the laggard among Group of Seven central banks in commencing a “rate-cut campaign”.
• Meanwhile, improving business confidence in the economic outlook amid hopes of rate cuts could make price pressures more persistent.
• PMI numbers, reported by the S&P Global for January, were significantly up and marked a promising start for 2024. Also, Oil supply disruptions in the Red Sea could escalate inflationary pressures in the manufacturing sector.
• This could allow BoE policymakers to stretch the restrictive interest rate stance.
• The United States Q4 Gross Domestic Product (GDP) data, released on Thursday, indicated that the economy is growing at a robust pace, allowing Federal Reserve (Fed) policymakers to hold back interest rate-cuts in the first-half of 2024.
• The US Dollar Index (DXY) fails to recapture an almost six-week high of 103.80 as investors await the core PCE price index data for December.
• Monthly core PCE is estimated to have risen by 0.2% in December against 0.1% in November. The annual underlying inflation data rose at a slower pace of 3.0% versus the former reading of 3.2%. Fed policymakers would deliver a hawkish interest rate outlook if the economic data turns out stubborn-than-projected.

Technical Analysis: Pound Sterling stabilizes above 1.2700

Pound Sterling maintains auction above the round-level resistance of 1.2700 ahead of the . The price action in the GBP/USD pair demonstrates a steep contraction in volatility. The near-term demand for the Cable is fading as it is struggling to sustain above the 20-period Exponential Moving Average (EMA), which trades around 1.2700. An inventory adjustment auction after a sharp rally is visible on the daily timeframe, which signifies an absence of a potential economic trigger for fresh guidance.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00, indicating absence of fresh impetus.