Daily digest market movers: Pound Sterling eyes downside amid multiple headwinds

The Pound Sterling is expected to face pressure as the United Kingdom ONS has reported softer-than-expected consumer price inflation data for February. The annual headline inflation significantly decelerated to 3.4% from expectations of 3.6% and the prior reading of 4.0%. The monthly headline CPI grew by 0.6%, rebounding from a similar decline seen in January. Investors anticipated the monthly headline inflation to grow at a higher pace of 0.7%.

The annual core CPI, which strips off volatile food and energy prices, softened to 4.5% from estimates of 4.6% and the former reading of 5.1%. BoE policymakers generally consider the core inflation data as a preferred measure for decision-making on interest rates. Soft figures might increase their confidence that inflation will sustainably return to the desired rate of 2%. BoE policymakers have been reiterating that rate cuts would be appropriate only if they get the conviction that the inflation target will be achieved.

The Pound Sterling is expected to remain volatile as investors will shift focus to the Bank of England’s interest rate decision, which will be announced on Thursday. The BoE is expected to keep interest rates unchanged at 5.25% for the fifth time in a row. Investors will look for cues about when the BoE will start reducing interest rates. Currently, investors hope that the BoE will start reducing interest rates from the August meeting. The soft inflation data released on Wednesday is likely to reinforce these expectations.

Meanwhile, the market sentiment remains cautious ahead of the Federal Reserve’s monetary policy decision. The CME FedWatch tool shows that the central bank is set to keep interest rates unchanged in the range of 5.25%-5.50%. With the no-change in interest rates almost fully priced in,  the monetary policy statement, Fed Chair Jerome Powell’s press conference, and the dot plot and economic projections will be in focus.