Pound Sterling gains against US Dollar as investors’ risk appetite improves

• The Pound Sterling rebounds as market mood improves and the US Dollar faces a modest correction.
• BoE Bailey says he doesn’t see market expectations for two or three rate cuts as unreasonable.
• This week, the US Dollar’s moves will be driven by the core PCE price index data. 

The Pound Sterling (GBP) extends its upside above 1.2650 against the US Dollar in Tuesday’s early American session as the latter faces profit-taking after refreshing monthly highs. The GBP/USD pair exhibits a sound recovery even though investors expect that the Bank of England (BoE) will be more dovish this year than previously anticipated, driven by lower-than-anticipated inflation data in January and February

The BoE said last week in its monetary policy statement that the central bank is not at a point where interest rates can be reduced. However, policymakers didn’t rule out the market’s view of two or three rate cuts this year. Two BoE policymakers, Catherine Mann and Jonathan Haskel – who voted for rate hikes in February – dropped their hawkish calls on interest rates in the March meeting. This has boosted confidence among investors that inflation in the United Kingdom is moving in the right direction.

Meanwhile, BoE Catherine Mann said in a statement released in Tuesday’s European session that she changed her vote on rates due to consumers disciplining firms’ pricing, the changing dynamic in labor markets, and the financial market curve. Mann added, “Discretionary services inflation has softened in the last couple of months.” Mann further added that market is pricing in too many cuts in interest rates.

This week, the market sentiment will drive the Pound Sterling’s next move as the UK economic calendar is light. Investors will keenly focus on the United States core Personal Consumption Expenditure Price Index (PCE) data for February, which will be published on Good Friday. The annual Core PCE is forecasted to have grown at a steady pace of 2.8%.

Daily digest market movers: Pound Sterling rises as US Dollar eases on firm Fed rate cut bets

• The Pound Sterling rebounds to 1.2650 against the US Dollar after discovering support near 1.2580. The GBP/USD pair discovers some buying interest as the US Dollar corrects after printing a fresh monthly high. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, falls to 104.16. The USD Index corrects as expectations for the Federal Reserve (Fed) reducing interest rates in the June policy meeting increase as policymakers still have faith has inflation is easing.
• The Fed remains confident that underlying price pressures are easing. However, hot US inflation in January and February suggested that the path toward achieving price stability could be bumpier than expected. Higher rentals and service inflation have fed the stubborn US Consumer Price Index (CPI). About rent inflation, Fed Governor Lisa Cook said on Monday, “Although housing-services inflation remains quite high, the current low rate of increase on new rental leases suggests that it will continue to fall.”
• Improved market sentiment has offered some relief to the Pound Sterling. However, the downside bias remains unabated as the Bank of England seems to adopt a slightly dovish tone on interest rates. In the recent monetary policy meeting, no policymakers voted for a rate hike for the first time since September 2021. BoE policymaker Catherine Mann was expected to vote for a rate hike.
• BoE Governor Andrew Bailey said in an interview with the Financial Times last week that market expectations for rate cuts this year are not unreasonable and delivered an optimistic tone on the economic prospects. Regarding the inflation outlook, Bailey said, “We are not seeing a lot of sticky persistence.”
• This week, trading volume could remain low due to Good Friday. Also, the United Kingdom’s economic calendar has nothing much to offer. However, the US core PCE Inflation data for February will be in focus.

Technical Analysis: Pound Sterling recovers above 1.2600

The Pound Sterling bounces back after slipping below the crucial support of 1.2600. The GBP/USD pair has been trading broadly sideways in a wider range between 1.2500 and 1.2900 for almost the last four months. The 200-day Exponential Moving Average (EMA) at 1.2558 will be a major cushion for the Pound Sterling bulls.

The 14-period Relative Strength Index (RSI) saw a pullback move after dipping to 40.00. A bearish momentum would trigger if the RSI dips below this level.