Pound Sterling Rallies on Improved Risk Appetite

• Pound Sterling advances above 1.2800 against the US Dollar on upbeat market sentiment.
• High inflation and recession fears in the UK may complicate the idea of BoE remaining a laggard in cutting rates.
• The economic calendar is light due to the festive season.

The Pound Sterling (GBP) prints a fresh four-month high as investors hope that the Bank of England (BoE) will maintain a restrictive monetary policy stance for a longer period than other Group of Seven economies. The GBP/USD pair has continued its four-day winning streak as the market mood is quite cheerful due to early rate cut expectations from the Federal Reserve (Fed).

BoE policymakers are expected to face enormous difficulties as price pressures in the United Kingdom are high and the economy is on the verge of a technical recession due to deteriorating demand in domestic and overseas markets. The BoE could be forced to turn dovish due to economic shrinkage.

Daily Digest Market Movers: Pound Sterling jumps higher while US Dollar tumbles

• Pound Sterling refreshes four-month high as the risk-appetite of the market participants continues to surge.
• The overall market mood remains upbeat as investors lean towards expectations of early rate cuts by the Federal Reserve.
• The Fed is expected to start lowering borrowing costs from March as price pressures in the United States economy are clearly in a downtrend.
• Action in the FX domain clearly indicates that markets are confident about early rate cuts by the Fed. The US Dollar continues to face pressure despite thin trading volume and empty economic docket.
• The Pound Sterling continues to enjoy higher demand as the Bank of England is expected to be laggard in the adaptation of a rate-cut mindset.
• The underlying inflation in the UK economy is highest in comparison with other Group of Seven economies, which would force BoE policymakers to remain leaned towards restrictive monetary policy stance.
• The UK core Consumer Price Index (CPI) has softened to 5.1% but is still more than double the required rate of 2% due to robust wage growth.
• This would allow BoE policymakers to stick with a restrictive monetary policy stance for a longer period.
• Meanwhile, expectations of a technical recession in the UK economy have deepened after the Office for National Statistics (ONS) revised in a slight contraction in Q3 Gross Domestic Product (GDP) by 0.1%, escalating the need for early rate cut discussions.
• Chances for unwinding of BoE’s tight monetary policy stance would escalate if the UK economy shrinks in the last quarter of 2024.
• The BoE reported in its latest projections that the economy would remain stagnant in the last quarter.
• UK Finance Minister Jeremy Hunt said last week there is a reasonable chance that if we stick to the course, the administration would be able to bring inflation down and the central bank would start cutting interest rates.
• This week, the economic calendar is light. Therefore, investors will focus on the weekly Initial Jobless Claims data for the week ending December 22, which will be published at 13:30 GMT.
• As per the consensus, individuals claiming jobless benefits are forecast to be higher at 210K from the former reading of 205K.

Technical Analysis: Pound Sterling aims for stability above 1.2800

Pound Sterling climbs slightly above the round-level resistance of 1.2800, being supported by cheerful market mood. The Cable aims stability above the 61.8% Fibonacci retracement (plotted from July 14 high at 1.3142 to October 4 low at 1.2037) at 1.2740. The upward-sloping 20-day Exponential Moving Average (EMA) at 1.2670 continues to support the Pound Sterling bulls.

The Relative Strength Index (RSI) (14) has climbed above 60. Sustainability above aforementioned levels would trigger a bullish momentum.