Pound Sterling advances on fiscal support as uncertainty over BoE rate cuts persists

• The Pound Sterling remains upbeat amid hopes that the Fed will cut interest rates before the Bank of England.
• The UK budget for 2024 was broadly in line with market expectations.
• Easing US labor market conditions have built downward pressure on the US Dollar.

The Pound Sterling (GBP) exhibits strength against the US Dollar in Thursday’s London session as investors hope that the Bank of England (BoE) will start reducing interest rates after the Federal Reserve (Fed). Market expectations for a rate cut by the BoE and the Fed are for June and August policy meetings, respectively.

Apart from expectations that the BoE will choose to cut interest rates later than other central banks of the Group of Seven economies (G-7), the announcement of the scope of fiscal stimulus in the United Kingdom’s budget for 2024 has also strengthened the Pound Sterling.

The Chancellor of the Exchequer, Jeremy Hunt, said on Wednesday that the UK administration intends to reduce public sector net debt and budgetary deficit while supporting economic growth.  

Going forward, the UK’s Average Earnings data for the three months ending in January, which will be published early next week, will provide a fresh outlook on inflation. Wage growth has remained at a level that almost doubles what is required to be consistent for the return of inflation to 2%. Strong wage growth momentum would dampen market expectations for rate cuts, which could benefit the Pound Sterling.

Daily digest market movers: Pound Sterling extends winning spell

• The Pound Sterling edges higher above 1.2700 as investors seek fresh insights on the interest rate outlook.
• The measures outlined in the United Kingdom budget 2024, announced by the Chancellor of the Exchequer Jeremy Hunt, were majorly aligned with expectations. Hunt announced a two-percentage cut to National Insurance Contributions (NICs), saving the average earner around 450 pounds this year. Combined with last year’s cut, total savings for workers would be 900 pounds.
• Jeremy Hunt announced that the OBR had raised growth forecasts for 2024 and 2025 to 0.9% and 1.9%, respectively. The administration intends to increase defense spending to 2.5% of the Gross Domestic Product (GDP). Capital gains tax on property sales will be lowered to 24% from 28%. The government has extended the freeze on fuel and alcohol duty.
• Going forward, market expectations for rate cuts by the Bank of England will guide the Pound Sterling. Investors expect the BoE to start reducing interest rates in August. However, BoE policymakers have said that they want evidence of inflation returning sustainably to 2% before taking such a decision.
• On the other side of the Atlantic, the United States ADP Employment Change for February and JOLTS Job Openings data for January pointed to slowing labor demand. This has built downside pressure on the US Dollar. The US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, has revisited a monthly low near 103.20.
• The uncertainty over the timing of the Federal Reserve rate cut continues, as Chair Jerome Powell said, "We do not expect it will be appropriate to reduce policy rates until we have greater confidence in inflation moving sustainably toward 2%," in his prepared statement in the semi-annual monetary policy report delivered to Congress.

Technical Analysis: Pound Sterling trades close to monthly high

Pound Sterling continues its winning spell for the fifth trading session on Thursday. The GBP/USD pair strengthens after an upside break of the Descending Triangle pattern formed on a daily time frame. The pair has printed a fresh monthly high near 1.2760. An upside break of the aforementioned chart pattern indicates that ticks forming on the upside will be wider than average. The 20-day Exponential Moving Average (EMA) near 1.2670 has tilted towards the north, indicating that the near-term appeal is strong.

The 14-period Relative Strength Index (RSI) climbs above 60.00 for the first time in over two months. This indicates a strong upside momentum ahead as overbought and divergence signals are absent.