Pound Sterling drops sharply as the downbeat market mood dampens the appeal of risk-sensitive assets.

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• Pound Sterling drops sharply as the downbeat market mood dampens the appeal of risk-sensitive assets.
• Investors await the BoE policy, which is seen as steady for the fourth time in a row.
• The outlook on interest rates will be of utmost importance.

The Pound Sterling (GBP) remains under pressure ahead of the interest rate decision by the Bank of England (BoE), which will be announced at 12:00 GMT. Most Monetary Policy Committee (MPC) members are expected to support maintaining the status quo as easing price pressures indicate that further quantitative tightening is not on the table. BoE policymaker Swati Dhingra, who has remained concerned about the consequences of over-tightening borrowing rates, could vote in favor of a rate cut.

BoE Governor Andrew Bailey and other members have been stating that it is too early to speculate on rate cuts despite encouraging progress in inflation declining towards 2%. UK’s headline inflation is significantly down from a multi-decade high of 11.1% to 4.0%. However, it is still double the desired rate of 2%, forcing policymakers to maintain interest rates in the restricted trajectory.

Neutral guidance on interest rates could improve the appeal of the Pound Sterling, but the outlook for the United Kingdom’s economy will worsen further. The UK economy is underperforming on the grounds of consumer spending, economic activities, and the labor market. An absence of rate-cut signals would dampen the aforementioned economic triggers further.

Meanwhile, dismal market sentiment has weighed heavily on the Pound Sterling. The market mood turns vulnerable as the Federal Reserve (Fed) is in no rush to cut interest rates in March.

Pound Sterling remains on the backfoot ahead of the BoE’s monetary policy decision but remains inside the last three weeks’ trading range of 1.2640-1.2775. The GBP/USD demonstrates a sharp volatility contraction on a broader timeframe, which may be the precursor of an eventual decisive break after the policy announcement by the BoE.

On the daily timeframe, a descending triangle chart pattern is in formation, which indicates indecisiveness with a slight negative bias. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive break through these boundaries would confirm a stronger directional move higher or lower – the BoE meeting may provide the catalyst.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates that investors await a potential trigger for further action.

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