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- Pound Sterling edges down amid risk-off mood, UK’s Spring budget in focus
Pound Sterling edges down amid risk-off mood, UK’s Spring budget in focus
- Pound Sterling drops amid market caution ahead of UK’s budget, Fed Powell’s testimony.
- Limited exposure to fiscal stimulus in the UK’s spring budget would reinforce hopes of BoE rate cuts.
- Investors await the UK and US PMI data for fresh guidance.
The Pound Sterling (GBP) falls slightly from the crucial resistance of 1.2700 in Tuesday’s European session. The GBP/USD pair has come under pressure due to diminishing investors’ risk appetite and uncertainty ahead of the United Kingdom’s Spring budget, to be outlined by Chancellor Jeremy Hunt on Wednesday.
The scope of fiscal measures will be a balancing act for Jeremy Hunt as the UK economy faces a stubborn inflation outlook and deteriorating growth forecasts. “We’ve always said we would only cut taxes in a way that’s responsible and prudent,” Hunt said on Sunday, according to BBC News
Limited scope for tax cuts would escalate hopes of early rate cuts by the Bank of England (BoE), a scenario that could weigh on the Pound Sterling.
Meanwhile, a dismal market sentiment ahead of Federal Reserve Chair Jerome Powell’s testimony before Congress, also due on Wednesday, and an array of United States economic data this week has brought some relief for the US Dollar.
In today’s session, investors will focus on the final S&P Global/CIPS UK Services PMI, to be released at 09:30 GMT, and the US S&P Global and ISM Services PMIs, which will be published at 14:45 GMT and 15:00 GMT, respectively.
Daily digest market movers: Pound Sterling falls amid cautious market mood
- The Pound Sterling drops from the round-level resistance of 1.2700 amid caution ahead of the United Kingdom’s Spring budget and packed United States economic calendar.
- The market participants will keenly focus on the Spring budget to be announced by Chancellor Jeremy Hunt. An indication of higher fiscal stimulus through tax cuts, a decline in national insurance rates, and significant public spending plans against revenue-raising tools would weaken hopes of early rate cuts by the Bank of England as fiscal stimulus could fuel inflationary pressures.
- The Conservative government’s plan is expected to lean towards spurring growthto avoid the economy falling into a recession again. However, a big stimulus package isn’t expected.
- BoE policymakers have indicated that the technical recession observed in the second half of 2023 was shallow.
- The economy is probably back on track for growth as Retail Sales and PMIs are improving meaningfully. However, an array of liquidity measures is required to confirm that the economy must not get derailed from the path of recovery.
- On the contrary, the limited scope of fiscal measures could prompt chances of early rate cuts by the BoE. Markets expect the BoE to start reducing interest rates in August, when inflation is expected to return to the 2% target before increasing again.
- Meanwhile, the US Dollar rebounds after printing a fresh two-day low near 103.70 as the market sentiment turns cautious ahead of Federal Reserve Chair Jerome Powell’s testimony before Congress on Wednesday and a bunch of US economic data such as the ISM Services PMI, ADP Employment Change, JOLTS Job Openings, and the Nonfarm Payrolls.
- Powell is expected to warn about the potential risks of early rate cuts, reiterating the need for more evidence to confirm that inflation will return to the 2% target.
Technical Analysis: Pound Sterling struggles to recapture 1.2700
The Pound Sterling is at a make or a break near the downward-sloping border of the Descending Triangle pattern formed on a daily time frame, placed from December 28 high at 1.2827. A decisive break above the same could result in a sharp upside move. The horizontal support of the aforementioned chart pattern is plotted from December 13 low near 1.2500.
Usually, a Descending Triangle pattern exhibits indecisiveness among market participants, but it has a slight downside bias due to lower highs and flat lows.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sharp volatility contraction.
Pound Sterling FAQs
What is the Pound Sterling?
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
How do the decisions of the Bank of England impact on the Pound Sterling?
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
How does economic data influence the value of the Pound?
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
How does the Trade Balance impact the Pound?
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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