Pound Sterling slumps against the US Dollar, focus shifts to Fed monetary policy

• The Pound Sterling trades weakly near 1.3350 against the US Dollar as the Greenback outperforms on the US-EU tariff deal.
• Investors expect the Federal Reserve to leave interest rates steady on Wednesday.
• Elevated UK inflation has weighed on households' spending.

The Pound Sterling (GBP) holds onto losses near its two-month low around 1.3350 against the US Dollar (USD) during the European session on Tuesday. The GBP/USD pair faces selling pressure as the US Dollar trades firmly after officials from the United States (US) and the European Union (EU) approved a trade agreement ahead of the August 1 tariff deadline over the weekend.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, trades close to a weekly high near 98.70.

The appeal of the US Dollar has strengthened as the US-EU trade deal has put fears of disruption in Washington's supply chain to an end, given the scale of business between both economies.

Meanwhile, investors await the outcome of high-level trade talks between the US and China, which are taking place in Stockholm from Monday. A report from the South China Morning Post (SCMP) showed on Monday that Washington and Beijing are expected to "extend their tariff truce for 90 days", which will expire on August 12.

Daily digest market movers: Pound Sterling trades with caution against its peers

• The Pound Sterling trades cautiously against its peers on Tuesday. The British currency has been underperforming over the last seven trading sessions due to cooling labor market conditions and elevated inflationary pressures, a scenario that could force the Bank of England (BoE) to perform a balancing act in its monetary policy announcement next week.
• Rising inflationary pressures have started biting households' spending power. A survey by the Confederation of British Industry (CBI) showed on Monday that retail sales declined for the 10th straight month in July. However, the pace of decline in retail sales was less severe than what was seen in June. The data came in at -34, improved from -46 in June.
• "Firms reported that elevated price pressures - driven by rising labour costs - and economic uncertainty continue to weigh on household demand, which has contributed to sales volumes falling since October 2024," analysts at CBI said.
• Meanwhile, traders are increasingly confident that the BoE will reduce interest rates in August's monetary policy meeting.
• This week, the GBP/USD pair will be influenced by the Federal Reserve's (Fed) monetary policy announcement on Wednesday. The Fed is certain to leave interest rates steady in the range of 4.25%-4.50% for the fifth consecutive time. Investors will pay close attention to guidance from the central bank on inflation and interest rates.
• In Tuesday's session, investors will focus on the US JOLTS Job Openings data for June, which will be published at 14:00 GMT. Economists expect US companies to have posted 7.55 million jobs, slightly lower than 7.77 million in May.

Technical Analysis: Pound Sterling delivers H&S breakdown

The Pound Sterling trades lower to near 1.3350 against the US Dollar at the time of writing on Tuesday, the lowest level seen in two months. The GBP/USD pair slides after a breakdown of the Head and Shoulders (H&S) chart pattern on a daily timeframe, following a downside move below the neckline plotted near 1.3413.

The pair trading below the 20-day Exponential Moving Average (EMA), which is around 1.3483, also suggests that the near-term trend is bearish.

The 14-day Relative Strength Index (RSI) slides below 40.00, indicating that a fresh bearish momentum has been triggered.

Looking down, the May 12 low of 1.3140 will act as a key support zone. On the upside, the July 1 high around 1.3790 will act as a key barrier.