Pound Sterling seeks fresh guidance on interest rates

The Pound Sterling (GBP) finds support in Friday’s European session after closing in negative territory on Thursday. The GBP/USD pair holds key 1.2600 support amid hopes that the Bank of England (BoE) will begin reducing interest rates after the Federal Reserve (Fed).

Investors anticipate that the BoE and the Fed will start cutting interest rates in August and June, respectively. This will ease policy divergence between the central banks for some time. The Pound Sterling would attract higher foreign inflows if the BoE maintained a hawkish stance for a longer period than other central banks.

The US Dollar comes under pressure as hopes of a rate cut by the Fed in June remain firm despite the United States monthly Personal Consumption Expenditure Price Index (PCE) data rising by 0.4% in January. Market participants already anticipated higher growth in monthly price pressures. In December, the core inflation data rose by 0.2%, revised down from 0.2%. Price pressures were expected to grow at a higher pace, but the momentum is inconsistent with the agenda of achieving a 2% inflation target.

In today’s session, February's US ISM Manufacturing PMI will be in focus. While the US Manufacturing PMI is anticipated to have risen to 49.5 from 49.1 in January.

Daily Digest Market Movers: Pound Sterling awaits fresh economic trigger

• Pound Sterling discovers interim support near 1.2600 against the US Dollar. Market expectations for the Federal Reserve's rate cuts in June remain on the table because the United States core PCE Price Index data for January, released on Thursday, was in line with expectations.
• The annual core PCE Price Index was the lowest in three years at 2.8%, as expected by market participants. The monthly core inflation data grew in line with expectations by 0.4%. The pace at which monthly price pressures rose is higher than what is required to bring down inflation to the 2% target.
• The underlying inflation data has kept hopes of rate cuts in the June meeting alive. As per the CME FedWatch tool, traders see a 52% chance for a rate cut by 25 basis points (bps). The probability of a rate cut in June remains unchanged after the release of the crucial inflation data.
• The US Dollar Index, which measures Greenback’s value against six major currencies, remains firm above 104.00.
• On the United Kingdom front, investors seek fresh cues about when the Bank of England will start reducing interest rates.
• The latest poll from Reuters showed that a rate-cut move from the BoE will come in the third quarter of this year. A slim majority is expecting it in the month of August.
• Currently, BoE policymakers believe that rate cuts would be discussed only after gaining confidence that inflation will come down to the desired rate of 2%.
• BoE policymakers are worried about the pace at which wage growth and service inflation are rising. The momentum in the aforementioned inflation indicators is higher than necessary for returning inflation sustainably to the 2% target.
• Meanwhile, the UK’s S&P Global/CIPS has reported that the Manufacturing PMI for February rose to a 10-month high of 47.5 against expectations and the prior reading of 47.1.

Technical Analysis: Pound Sterling finds support near 1.2600

Pound Sterling hovers near the round-level support of 1.2600. The pair drops toward the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2640. 

The near-term trend is sideways as the asset oscillates inside the Descending Triangle formation on a daily timeframe. The downward-sloping border of the aforementioned chart pattern is placed from December 28 high at 1.2827, while the horizontal support is plotted from December 13 low near 1.2500.

A Descending Triangle pattern exhibits indecisiveness among market participants but with a slight downside bias due to the formation of lower highs and flat lows.

The 14-period Relative Strength Index (RSI) remains inside the 40.00-60.00 region, indicating a sharp contraction in