Pound Sterling flattens against US Dollar, Fed's policy under spotlight

The Pound Sterling (GBP) trades cautiously near 1.3350 against the US Dollar (USD) during the European trading session on Wednesday as investors await the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near the new monthly high of 99.00 posted on Tuesday.

According to the CME FedWatch tool, bond markets are almost fully pricing in that the Fed will leave interest rates steady in the range of 4.25%-4.50%. This would be the fifth straight policy meeting in which the US central bank will hold borrowing rates at the current levels.

Investors will pay close attention to Fed Chair Jerome Powell’s press conference for fresh cues on the monetary policy outlook for the remainder of the year. At least two out of the 12 members of the Federal Open Market Committee (FOMC), Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, are expected to support lowering interest rates. Before the blackout period, both policymakers argued in favor of an interest rate reduction as early as this month, citing downside risks to the labor market.

On the contrary, other officials stated that there should be no rush for interest rate cuts as the impact of tariffs imposed by Washington on various imports has started feeding into prices. The Consumer Price Index (CPI) report for June also showed that prices of products that are largely imported in the US have increased partly due to the levies.

Daily digest market movers: Pound Sterling trades flat against its peers

• The Pound Sterling trades almost flat against its major peers, except the Japanese Yen (JPY), on Wednesday. The British currency is expected to remain under pressure in the medium term as the Bank of England (BoE) is almost certain to cut interest rates in next week’s monetary policy meeting.
• Traders have become increasingly confident that the BoE will reduce its key borrowing rates on August 7 as United Kingdom (UK) labor market conditions have cooled down, following an increase in employers’ contributions to social security schemes.
• The latest survey from the Confederation of British Industry (CBI) showed on Monday that households’ spending has diminished due to a slowdown in the labor demand. The agency reported that retail sales declined for the tenth straight month in July. However, the pace of decline in retail sales was less severe than what was seen in June.
• In the US, investors will also focus on the preliminary Q2 Gross Domestic Product (GDP) and Personal Consumption Expenditure Price Index (PCE), and the ADP Employment Change data for July, which will be published during the North American session.
• The data is expected to show that the economy grew at 2.4% after contracting by 0.5% in the first quarter of the year. Meanwhile, core PCE inflation, which is the Fed’s preferred inflation gauge, is expected to have grown at a more moderate pace of 2.4% compared to the 3.5% increase seen in the previous quarter.
• Economists expect the US private sector to have added 78K fresh workers in July after the 33K decline seen in June.

Technical Analysis: Pound Sterling forms H&S chart pattern

The Pound Sterling strives to hold the immediate support of 1.3300 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair remains bearish as the 20-day Exponential Moving Average (EMA) slopes downwards to near 1.3473.

The formation of a Head and Shoulder (H&S) chart pattern also suggests that the overall trend is bearish. The neckline of the H&S formation is plotted near 1.3413.

The 14-day Relative Strength Index (RSI) oscillates below 40.00, indicating that the bearish momentum is intact.

Looking down, the May 12 low of 1.3140 will act as a key support zone. On the upside, the July 1 high around 1.3790 will act as a key barrier.