Pound Sterling steadies while US Dollar rises on persistent price pressures

• The Pound Sterling holds gains near 1.2500 even though the US Dollar recovers sharply.
• BoE Governor Andrew Bailey expects a sharp drop in April’s inflation.
• US GDP grew at a slower pace of 1.6% in the first quarter this year.

The Pound Sterling (GBP) aims to hold strength near the psychological resistance of 1.2500 against the US Dollar (USD) in Thursday’s early American session. The GBP/USD struggles as the US Dollar rebounds sharply after the United States Q1 Gross Domestic Product (GDP) report showed that inflation accelerated sharply. The preliminary GDP Price Index rose sharply by 3.1% from the prior reading of 1.7%. This has prompted expectations that the Federal Reserve (Fed) will keep interest rates restrictive for a longer period.

Meanwhile, the US economy grew at a slower pace of 1.6% from expectations of 2.5% and the former reading of 3.4%. This has deepened concerns over the US economic outlook.

On the United Kingdom front, Investors’ confidence in the UK economy's outlook improved after the preliminary PMI report from S&P Global/CIPS for April showed that new business volumes increased across the private sector as a whole. The agency also reported that the rate of growth of overall activity was the strongest since May 2023. However, the expansion was centred on the service sector, as manufacturers saw a moderate downturn in order books.

Despite the recent upturn, downside risks to the Pound Sterling remain high as investors expect the Bank of England (BoE) will pivot to interest-rate cuts before the Federal Reserve (Fed) does so. Last week, BoE Governor Andrew Bailey said: “I expect next month's inflation number will show quite a strong drop.” Bailey added that Oil prices haven't leaped as much as expected and that the effect of the Middle-East conflict “is less than feared.”

Daily digest market movers: Pound Sterling struggles to hold gains as US Dollar rises

• The Pound Sterling hovers near the psychological resistance of 1.2500 against the US Dollar. A sharp recovery in the US Dollar has built slight pressure on the GBP/USD pair. The US Dollar moves higher as the higher GDP Price Index has offset the impact of weak GDP growth and a poor preliminary US PMI report that raised doubts over the strong economic outlook of the economy. Meanwhile, similar data for the UK presented a recovery in overall private-sector activity fueled by the Services sector.
• The US PMI report showed on Tuesday that surprisingly both the Manufacturing and Services PMI were down from the prior readings. The Manufacturing PMI even fell below the 50.0 threshold, signalling a contraction. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook. 
• Despite uncertainty over the US economic outlook, speculation that the Federal Reserve will begin lowering interest rates after the September meeting remains firm. Going forward, investors will focus on the core Personal Consumption Expenditure Price Index (PCE) data for March. 
• For more clarity over Fed’s rate-cut timing, investors will wait for the core PCE inflation data for March, to be published on Friday. The underlying inflation data is estimated to have grown steadily by 0.3% on month, with annual figures softening to 2.6% from the 2.8% recorded in February.

Technical Analysis: Pound Sterling trades close to 1.2500

The Pound Sterling extends its recovery to the crucial resistance of 1.2500 against the US Dollar. The GBP/USD pair moves sharply higher after finding strong buying interest near a five-month low of around 1.2300. The near-term outlook of the Cable is still bearish as the 20-day Exponential Moving Average (EMA) at 1.2509 is declining.

The 14-period Relative Strength Index (RSI) rebounds above 40.00, suggesting that a bearish momentum has concluded for now. However, the bearish bias remains intact.