The Pound Sterling (GBP) experienced a significant decline, falling below the key level of 1.2500 against the US Dollar (USD) during Wednesday’s trading session in London. This movement comes amid a week with few economic announcements from the UK, which places greater focus on the USD due to a busy week for the US, highlighted by the upcoming Federal Reserve (Fed) decision.
Market expectations for the Bank of England (BoE) to reduce interest rates in the coming months have heavily influenced the GBP. Speculation is particularly pointed towards potential rate cuts in the June or August meetings, following comments from BoE Governor Andrew Bailey indicating confidence that inflation will drop to 2% by April. Current inflation rates stood at 3.2% as of March.
Investor uncertainty has increased in anticipation of the Fed’s rate decision, scheduled for 18:00 GMT. It is widely anticipated that the Fed will maintain the current interest rates but may adopt a hawkish stance due to ongoing high inflation figures, which challenge the ease of achieving the 2% inflation target. The continued high-interest rate environment in the US is boosting the USD’s appeal while negatively impacting currencies from countries where earlier rate cuts are anticipated.
The US Dollar Index (DXY), which measures the USD against a basket of six major currencies, has reached a two-week high, approaching 106.50.
As the Federal Reserve’s monetary policy decision nears, the Pound Sterling adjusted downwards to 1.2480 against the USD. According to the CME FedWatch tool, the interest rates are expected to stay within the 5.25%-5.50% range, marking the sixth consecutive time without change. While rate changes are not expected, the market’s focus will be on the Fed’s commentary and Fed Chairman Jerome Powell’s press conference for insights into future interest rate movements.
Recent US economic data has shown strong figures, such as the Employment Cost Index for the first quarter, which outperformed expectations at a rise of 1.2% against the predicted 1.0%. This is indicative of robust wage growth, which can increase consumer spending and fuel inflation.
In the lead-up to the Fed’s meeting, attention will also be on the release of the ADP Employment Change and the ISM Manufacturing PMI for April. Expectations are set for the ADP report to show a slight decrease in jobs added compared to March, and the Manufacturing PMI is projected to hover around the critical 50.0 mark, indicating a potential contraction in factory activity.
Technical Analysis: Pound Sterling’s Current Position
The Pound Sterling has notably dropped against the US Dollar, struggling to break past the significant resistance level at 1.2570. The currency pair has also not managed to stay above the 20-day Exponential Moving Average (EMA) at 1.2510, pointing to an uncertain short-term outlook.
A previous Head and Shoulders (H&S) pattern has created a substantial resistance level, particularly evident when the GBP/USD pair experienced a sharp sell-off on April 12 after breaking below the pattern’s neckline, established around the December 8 low of 1.2500.
The 14-period Relative Strength Index (RSI) is currently fluctuating between 40.00 and 60.00, indicating a lack of clear direction in market sentiment.