Pound Sterling wobbles against US Dollar at the start of Fed-BoE monetary policy week

• The Pound Sterling is broadly sideways around 1.3580 against the US Dollar ahead of Fed-BoE monetary policy announcements this week.

• Investors expect both central banks to hold interest rates steady.

• Investors remain on their toes as tensions between Israel and Iran have escalated.

The Pound Sterling (GBP) ticks up to near 1.3590 against the US Dollar (USD) so far on Monday, remaining inside Friday’s trading range. The GBP/USD pair is expected to keep trading within a tight range as investors have sidelined ahead of monetary policy announcements by the Federal Reserve (Fed) and the Bank of England (BoE), due on Wednesday and Thursday, respectively.

At the start of the week, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down to near 98.00.

Investors will closely monitor the interest rate guidance from both central banks, while they are expected to leave those unchanged at their current levels. 

Fed officials have stated that interest rates should remain in the current range of 4.25%-4.50% for a longer time until they get clarity about how the imposition of new economic policies by United States (US) President Donald Trump will influence inflation and impact economic growth. Policymakers have warned that Trump’s agenda could prove to be inflationary for the economy.

In the Fed’s monetary policy announcement, investors will pay close attention to the dot plot, which shows where policymakers see interest rates heading in the near and long term. 

Daily digest market movers: Pound Sterling rises against its major peers

The Pound Sterling trades higher against its major peers on Monday, with investors awaiting the BoE’s interest rate announcement. The United Kingdom (UK) central bank is expected to leave borrowing rates steady at 4.25% on Thursday as officials guided a “gradual and careful” monetary-expansion approach, following a 25-basis-points (bps) interest rate reduction in May’s policy meeting.

Financial market participants doubt that the BoE will retain its “gradual and careful” policy easing guidance as the latest employment data for the three-month period ending April showed cracks emerging in the job growth pace.

UK business owners slowed down their hiring pace to offset the impact of an increase in their contribution to the social security scheme, which became effective in April. In the UK Autumn Statement, Chancellor of the Exchequer Rachel Reeves announced an increase in employers’ contribution to National Insurance (NI) to 15% from 13.8%.

Ahead of the BoE monetary policy, investors will also focus on the UK Consumer Price Index (CPI) data for May, which is scheduled to be released on Wednesday. The UK CPI report is expected to show that price pressures grew at a moderate pace.

On the global front, escalating geopolitical tensions in the Middle East are likely to limit investors’ appetite for risk-sensitive assets, such as the Pound Sterling. Israeli Defence Minister Israel Katz has threatened to accelerate attacks on Iran if Iran continues firing missiles at Israel, Euronews reported. “Tehran will burn if it keeps launching attacks on Israel,” Katz said. Meanwhile, Iran has threatened to choke off the Strait of Hormuz, the world’s most important gateway for Oil shipping, Reuters reported.

Technical Analysis: Pound Sterling consolidates below 1.3600

The Pound Sterling is broadly sideways below 1.3600 against the US Dollar on Monday. The near-term trend of the GBP/USD pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3500.

The 14-day Relative Strength Index (RSI) struggles to break decisively above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.

On the upside, the 13 January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the horizontal line plotted from the September 26 high of 1.3434 will act as a key support zone.