Sterling rises slightly despite rising BoE rate cut expectations

• The British Pound finds support near 1.2620 against the US Dollar.
• The UK’s economic outlook looks uncertain ahead of the UK election.
• The BoE is expected to start lowering interest rates in August.

The British Pound (GBP) gains ground against the US Dollar (USD) and trades around 1.2650 in the London session on Monday after facing a sharp sell-off last week. The GBP/USD pair rebounds as the bullish movement in the US Dollar Index (DXY), which tracks the value of the Dollar against six major pairs, appears to have stalled and struggles to extend above the immediate resistance of 106.00.

However, the near-term outlook for the US dollar has strengthened after S&P Global’s preliminary Purchasing Managers’ Index (PMI) report for June showed that activities in the manufacturing and services sector expanded surprisingly at a faster pace than expected. The report showed that the composite PMI surprisingly jumped to 51.7. Investors expected the PMI data to fall to 51.0 from the previous release of 51.3.

The report also lifted the mood of Federal Reserve (Fed) policymakers as it said, “Selling price inflation, meanwhile, has cooled again after rising in May, falling to one of the lowest levels seen in the last four years. Historical comparisons indicate that the latest decline brings the survey’s price indicator in line with the Fed’s 2% inflation target.”

Daily Market Summary: Sterling Performs Strongly Against Most Currencies

• The British Pound is performing strongly against its major peers except the Euro, although financial markets expect the Bank of England (BoE) to begin reducing interest rates from its August meeting. Market speculation that the BoE will begin lowering its key interest rates in August was fueled by slightly dovish monetary policy commentary on the outlook for interest rates.
• In the monetary policy statement, policymakers said the decision to keep interest rates at 5.25% was “finely balanced,” which investors interpreted as a sign that rate cuts are around the corner.
• Market expectations for BoE rate cuts have also strengthened as headline annual inflation has returned to the desired rate of 2%. At the press conference after the June meeting, BoE Governor Andrew Bailey acknowledged, “It is good news that inflation is back to our 2% target.” And “officials want to be sure that inflation will remain low, so we have decided to leave interest rates unchanged.”
• Although price pressures have returned to 2%, officials worry about the risks of persistent inflation in services. In May, services inflation slowed at a slower pace, to 5.7% from the previous release of 5.9%. Investors had expected core inflation to have fallen to 5.5%.
• Meanwhile, investors have become concerned about the UK’s economic outlook after the S&P Global/CIPS preliminary PMI report showed overall activity unexpectedly slowed in the services sector in June. However, the manufacturing PMI expanded at a faster pace than estimates and the previous release. “The slowdown partly reflects uncertainty around the business environment in the run-up to the general election, with many businesses seeing a pause in decision-making pending clarity on various policies,” the report said.

Price of the Pound Sterling today:

Technical Analysis: Sterling rebounds from 1.2620

The British Pound finds temporary support near 1.2620 against the US Dollar. However, the short-term appeal is uncertain as the GBP/USD pair has fallen below the 20-day and 50-day EMAs, which are trading around 1.2700 and 1.2670, respectively.

The Pound also falls below the 61.8% Fibonacci retracement support at 1.2667, drawn from the March 8 high of 1.2900 to the April 22 low of 1.2300.

The 14-day RSI falls back into the 40.00-60.00 range, indicating that the bullish momentum has faded.