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Pound Sterling edges higher in improved market sentiment

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Pound Sterling moves higher while investors seek fresh guidance on interest rates.
High wage growth and service inflation keep the UK’s inflation sticky.
The core PCE inflation data will guide further action in the US Dollar.

The Pound Sterling (GBP) is stuck in a tight range in Monday’s European session as investors need more insights on the Bank of England’s (BoE) interest rates for fresh action. The GBP/USD struggles for direction as uncertainty over the timing of rate cuts by the BoE and the Federal Reserve (Fed) continues to persist.

Policymakers from the BoE and the Fed are reluctant to offer details on the timing of rate cuts as they need more evidence to confirm that inflation will come down to the 2% target. The United Kingdom’s wage growth and service inflation are skewed to the upside, remaining inconsistent with the rate required to achieve price stability. 

The US Dollar Index (DXY), which gauges the value of the US Dollar against six rival currencies, oscillates in a range around 104.00 amid a data-packed week. Investors will keenly watch the core Personal Consumption Expenditure price index (PCE) data for January, which will deliver a meaningful outlook on interest rates. 

Daily Digest Market Movers: Pound Sterling tracks sideways US Dollar

Pound Sterling consolidates in a tight range around 1.2660 as investors await fresh guidance on the Bank of England’s interest rates.
The market expectations for early rate cuts are waning due to higher wage growth.
In a testimony before the UK Parliaments’ Treasury Committee, BoE Deputy Governor Ben Broadbent said the momentum in wage growth is double that required to bring down inflation to its 2% target.
Investors await the commentary from various BoE policymakers this week.
The BoE has been reiteraing the need for maintaining interest rates unchanged at 5.25% until they get convinced that inflation will sustainably return to the desired rate.
Investors will keenly focus on commentary over concrete timing for rate cuts.  
Meanwhile, improving business optimism and economic outlook are a relief for BoE policymakers.
This would allow the BoE to avoid a “hard landing” in the battle against stubborn inflation. The hard landing indicates a sharp contraction in economic activities while achieving price stability.
While economists are anticipating an uptick in economic activities, recruitment data company Adzuna showed that job postings by British employers were hit significantly in January.
The agency reported that job advertisements were 15% down annually at 867,000. 
“January 2024 has proven to be one of the most difficult starts to the year for job hunters in recent years with companies continuing to put hiring plans on ice,” Adzuna co-founder Andrew Hunter said.
Cooling labor market conditions would tame strong wage growth and will eventually provide a sigh of relief to BoE policymakers.
Meanwhile, the US Dollar remains subdued even though investors have been convinced that the Federal Reserve (Fed) will not cut interest rates in the March-May monetary policy meetings.
Last week, New York Federal Reserve President John Williams said rate cuts are on track later this year. When asked about sticky January Consumer Price Index (CPI) data, Williams said “My overall view of the economy basically hasn’t changed based on one month of data.”

Technical Analysis: Pound Sterling struggles to climb abobe 1.2700

Pound Sterling trades inside Friday’s trading range as investors need fresh cues over the interest rate outlook. The broader outlook is sideways too as the pair oscillates in the Descending Triangle pattern formed on a daily timeframe. The aforementioned chart pattern indicates a sharp volatility contraction, carrying a slightly negative bias due to its formation of lower highs.

The horizontal support is plotted from December 13 low near 1.2500, while the downward-sloping border of the Descending Triangle pattern is placed from December 28 high at 1.2827. The pair holds above the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2630. Meanwhile, the 14-period Relative Strength Index (RSI) trades in the 40.00-60.00 region, indicating indecisiveness among market participants

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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