Pound Sterling remains fragile as soft UK inflation prompts BoE rate cut bets

• The Pound Sterling trades below 1.3000 against the US Dollar as slowing UK inflation fuels BoE’s dovish bets.
• UK service inflation slowed to 4.9%, the lowest level since May 2022.
• Growing speculation of a Trump victory in the US presidential elections has strengthened the US Dollar.

The Pound Sterling (GBP) bears take a breath after sliding to near 1.2970 against the US Dollar in Thursday’s London session. However, the outlook of the GBP/USD pair remains vulnerable as the US Dollar rises further as traders have priced out Federal Reserve’s (Fed) large rate cut bets in November.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh over 10-week high near 103.60. Market participants don’t expect the Fed to continue with hefty rate cuts as the recent United States (US) labor market data for September showed that the labor market remains quite resilient.

According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that markets broadly expect the central bank will cut interest rates by 25 basis points (bps) in both policy meetings in November and December.

Meanwhile, rising expectations for former US President Donald Trump winning the US presidential elections, scheduled for November 5, has strengthened the US Dollar. Investors expect a Trump administration to provide looser financial conditions, higher import tariffs, and tax cuts.

In Thursday’s US session, investors will pay close attention to the monthly US Retail Sales data for September, a key measure of consumer spending, to be published at 12:30 GMT. Economists expect the Retail Sales to have grown by 0.3%.

Daily digest market movers: Pound Sterling struggles for firm-footing

• The Pound Sterling strives to gain ground against its major peers on Thursday after facing an intense sell-off on Wednesday. The British currency slumped after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for September, which showed that inflation grew at a slower-than-expected pace.
• Annual headline inflation decelerated to 1.7%, below the Bank of England’s (BoE) target of 2%. The core CPI – which excludes a few of the more volatile items – rose by 3.2%, also lower than expected. UK’s service inflation, a closely watched indicator by BoE officials for decision-making on interest rates, decelerated to 4.9%.
• Plunging inflationary pressures have bolstered BoE dovish bets. Traders are pricing in a 25 basis points (bps) interest rate cut in each of the two policy meetings that remain for the year. Before the inflation data release, market participants were anticipating the BoE to cut its key borrowing rates only once, either in November or December.
• British Finance Minister Rachel Reeves welcomed the sharp drop in inflation ahead of her first budget, which she will present on October 30. A sharp decline in price pressures should allow Reeves to spend more money on development.
• On the economic front, the next important data point in the UK is Retail Sales data for September, which will be published on Friday. The Retail Sales data, a key measure of consumer spending, is estimated to have declined 0.3% after gaining 1.1% in August on month-on-month. On an annual basis, the consumer spending measure is expected to have grown by 3.2%, higher than 2.5% in August.

Technical Analysis: Pound Sterling faces pressure near 1.3000

The Pound Sterling shifts below the psychological figure of 1.3000 against the US Dollar in the London trading hours. The GBP/USD pair weakened after breaking below the four-day trading range, extending between 1.3020 and 1.3100. The Cable was already under pressure after slipping below the upward-sloping trendline plotted from the 28 December 2023 high of 1.2827 earlier in October.

The near-term trend of the major looks vulnerable as the 20- and 50-day Exponential Moving Averages (EMAs) near 1.3135 and 1.3100, respectively, are sloping downwards.

The recent downside move in the Relative Strength Index (RSI) below 40.00 also suggests a bearish momentum is picking up.

Looking down, the 200-day EMA near 1.2840 will be a major support zone for Pound Sterling bulls. On the upside, the Cable will face resistance near the round-level figure of 1.3100.