Pound Sterling falls back from 1.2700 with US core PCE inflation in focus

• The Pound Sterling declines against the US Dollar as investors shift focus to the US core PCE inflation data for May.
• UK’s high wage inflation refrains BoE policymakers from committing to interest rate cuts.
• Uncertainty over the UK’s parliamentary elections will keep the Pound Sterling on tenterhooks.

The Pound Sterling (GBP) weakens against the US Dollar (USD) in Wednesday’s New York session. The recovery move in the GBP/USD pair from the more than five-week low of 1.2620 has stalled near the round-level resistance of 1.2700 as investors shift focus towards the United States (US) core Personal Consumption Expenditures Price Index (PCE) data for May, which will be published on Friday.

Investors will pay close attention to the US core PCE inflation data as it is the Federal Reserve’s (Fed) preferred inflation gauge. This data will provide fresh cues about when and how far interest rates will be reduced this year. Annually, the underlying inflation data is estimated to have softened to 2.6% in May from the prior release of 2.8%, with monthly figures growing at a slower pace of 0.1% from 0.2% in April.

Currently, investors expect the Fed to kickstart its rate-cutting cycle at the September meeting and extend it further in November or December.

On the contrary, Fed policymakers continue to advocate maintaining interest rates at their current levels for longer until they get evidence that inflation will return to the desired rate of 2%. Fed officials want to see inflation declining for months to gain confidence in rate cuts and, therefore, delivering a hawkish guidance.

On Tuesday, Fed Governor Michelle Bowman supported the continuation of the current policy framework for some time to tame price pressures. She kept hopes of more rate hikes on the table if disinflation stalls or reverses. When asked about timing for rate cuts, Bowman said she doesn’t see any this year.

Daily digest market movers: Pound Sterling remains downbeat against US and Australian Dollar

• The Pound Sterling performs strongly against a majority of its peers as fears of policy divergence have intensified due to strong wage growth in the United Kingdom. However, the Pound weakens against the Australian Dollar and the USD. Australia’s monthly Consumer Price Index (CPI) rose strongly by 4.0% from expectations of 3.8% and the prior release of 3.6%, which weighed on expectations of more rate cuts by the Reserve Bank of Australia (RBA).
• Unlike the Swiss National Bank (SNB), the Bank of Canada (BoC), and the European Central Bank (ECB), which have begun their policy-easing cycle, the Bank of England (BoE) has not committed to rate cuts in the near term.
• The UK’s high wage growth keeps inflation persistent in the service sector, making interest rate cuts inappropriate in the current situation. Although headline inflation has returned to the desired rate of 2%, officials see service inflation as a preferred measure for decision-making on interest rates and want it to decline for months to gain confidence in lowering borrowing rates.
• Currently, investors expect that the BoE will start reducing interest rates from the August meeting. Meanwhile, political uncertainty in the UK economy is expected to keep the Pound Sterling on its toes. Market participants expect that the opposition Labour Party has the upper hand in parliamentary elections on the Conservative Party. The first round of UK parliamentary elections will commence on July 4. 

Pound Sterling Price Today

Technical Analysis: Pound Sterling struggles to hold auction above 50-day EMA

The Pound Sterling faces pressure near 1.2700 against the US Dollar. The GBP/USD pair continues to find sellers near the 20-day Exponential Moving Average (EMA), which trades around 1.2700. Also, the Cable struggles to hold the 50-day EMA is acting as support at around 1.2670.

The Cable trades close to the 61.8% Fibonacci retracement support at 1.2667, plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a consolidation ahead.