The British Pound stops dead where American data left it

The British Pound has halted its recent gains, settling just below 1.3600 after a decline of approximately 0.4%, which places it about 55 pips under the session high of 1.3650. The currency experienced a drop during the two hours following the release of American economic data on Wednesday, with its performance remaining relatively flat at the lower levels since.

This pattern will be crucial for traders to keep in mind as they prepare for the following trading day. The Pound's increase over the past year is the most robust leg, starting from around 1.3300 in early August to a peak near 1.3700, and it is presently positioned well away from both the 50-day and 200-day Exponential Moving Averages.

Both moving averages are currently on an upward trajectory, indicating a bullish trend, and a Stochastic Relative Strength Index (Stoch RSI) value near 93 suggests that this upward movement has already been fully factored into the price. However, the extent of the responsibility for this movement remains unclear. Britain's contribution includes a July inflation rate of 2.9% and a decision in July to keep the Bank Rate at 3.75%, with a 6-3 vote, though three members favored a rate of 4.00%.

These factors are significant and were not new. The key events aligning with this movement occurred in Washington, where the Treasury's decision to double its purchases of longer-dated government debt led to a decline in the value of the Dollar across all major currencies. This parallel movement across the entire currency market sets the stage for how the Pound will react to similar market sentiment.

Wednesday's data release featured the Personal Consumption Expenditures (PCE) price index at 0.2% month-over-month, in line with expectations, with the core measure also unchanged at 0.2%. The annual PCE inflation rate stood at 3.7%, and the annual GDP price index was 3.3%. Traders interpreted the monthly data as a signal, while the annual figures were seen as noise, reducing the odds of a September interest rate hike to the high 30s and pricing a year-end increase at around 73%.

It is more challenging to refute the revisions present in the same release, which indicated a marked increase in core PCE prices from 3.4% to 3.7% quarter-over-quarter, and headline PCE prices from 5.1% to 5.3%. Additionally, the GDP price index increased from 6.3% to 6.4%. Real GDP growth remains steady at 1.5% annually. However, personal income increased by 0.4% compared to 0.3%.

Although the economy showed more inflation and less productivity, this outcome is contrary to the initial expectations. The next significant British economic event is the September 17 rate decision, scheduled three weeks away, with no accompanying Monetary Policy Report. Current pricing suggests a potential rate hike rather than a cut, with forecasts indicating a rate near 4.00% by November.

The dissenting bloc has grown from two members to three across two meetings. However, this information cannot be factored in until after the weekend, as there are no additional British economic reports available. The fiscal side of the equation is stronger and remains unchanged. Thirty-year gilt yields are currently near 5.80%, while the ten-year yield is above 5.00%, a trend that has reduced the headroom available for the October 28 Budget by an estimated £10 billion to £12 billion.

This fiscal risk is priced into the bond market but has not been addressed in the current rate market. As a result, the Pound is exposed to both rate and fiscal risks without any resolution this week. On Thursday, there are few trading opportunities beyond initial jobless claims at 12:30 GMT, which are expected to be released at 208K, slightly above the prior 206K figure.

The Kansas City Fed symposium begins on Thursday, generating headlines but not providing new data. The Chicago Purchasing Managers Index (PMI) follows at 13:45 GMT on Friday, with a consensus forecast of 57, matching the previous reading. Friday at 14:00 GMT is when the week's direction will be determined, and it will be a compressed session.

The Federal Reserve Chair delivers his first keynote at the Jackson Hole symposium on Friday, discussing the latest economic outlook. The speech is expected to focus on tightening monetary policy when underlying inflation rises alongside labor market conditions nearing equilibrium. However, labor market conditions are not near equilibrium following the 23K decrease in payrolls in July.

The Pound will be in a bearish position heading into Friday, as the rally was primarily driven by actions in Washington rather than London. The Stochastic RSI is near 93, indicating strong momentum, and there are few domestic economic events left to provide additional information. The key support level is at 1.3550, with the 1.3650 area acting as a resistance level.

Should the Pound close above 1.3650, it could target the August peak near 1.3700, which would be the next significant resistance level. Conversely, if the currency falls below 1.3550, it would invalidate the current bearish bias and provide support at the 1.3500 level, as well as the 50-day Exponential Moving Average at 1.3450, which may challenge the prevailing trend.

The overall bias for the week is bearish, with a target of 1.3550 and then 1.3500. An invalidation of this sentiment would occur if the Pound closes above 1.3650.