- The Pound Sterling maintains its strength following the UK Spring Budget announcement
- The measures outlined in the UK Budget have the potential to significantly impact the inflation outlook.
- Fed Powell, in his prepared remarks, did not provide timing for rate cuts.
In Wednesday’s late European session, the Pound Sterling (GBP) remains positive following the release of the United Kingdom’s 2024 budget statement. Chancellor of the Exchequer Jeremy Hunt noted that the Office for Business Responsibility (OBR) has revised upward Gross Domestic Product (GDP) growth forecasts for 2024. The UK’s economy is anticipated to grow by 0.9%, up from the 0.8% forecasted in November. The Conservative Party has emphasized its commitment to reducing the budget deficit to 1.2% in 2028-29.
As anticipated, the Conservative Party has unveiled a two-percentage-point reduction in National Insurance Contributions (NICs), offering an estimated savings of around 450 pounds for the average earner this year. With last year’s cut included, workers stand to save a total of 900 pounds.
Meanwhile, in the United States, Federal Reserve (Fed) Chair Jerome Powell has reiterated his reservations about inflation reaching the 2% target. Powell stated that rate cuts are likely at some point this year.
Daily digest market movers: Pound Sterling exhibits strength amid Hunt’s budget statement
- The Pound Sterling demonstrates strength following Chancellor of the Exchequer Jeremy Hunt’s announcement of fiscal stimulus, potentially impacting the United Kingdom’s inflation outlook. The expected two-percentage-point cut to NICs by Hunt is confirmed, providing an additional saving of 450 pounds for the average salaried worker in 2024.
- Hunt notes that the OBR has increased GDP forecasts for 2024 and 2025, with the UK economy expected to grow by 0.9% and 1.9% in 2024 and 2025, respectively. The Conservative Party anticipates a rise in defence spending to 2.5% of GDP. Additionally, the capital gains tax on property sales will decrease to 24% from 28%, and the freeze on duty for fuel and alcohol will be extended.
- A persistent inflation outlook allows the Bank of England (BoE) to uphold a hawkish stance for an extended period, particularly as the UK’s consumer price inflation is the highest among Group of Seven economies. BoE policymakers view the rate at which labor cost and service inflation are decreasing as double the required pace for inflation to sustainably reach the 2% target. The Pound Sterling tends to attract higher liquidity inflows when the BoE maintains restrictive interest rates.
- On the economic data front, S&P Global/CIPS reported that the Services PMI for February was slightly lower than expected, dropping to 53.8 from the previous reading of 54.3. Despite the downbeat performance, the index remains higher than every month in the second half of 2023. The agency notes, “Another solid expansion of business activity across the service sector in February adds to signs that the UK economy has turned a corner after entering a technical recession during the second half of 2023.”
- The US Dollar weakens as the US ADP Employment data disappoints, with private payrolls at 140K in February, falling short of the expected 150K.
- Meanwhile, in his prepared statements, Federal Reserve (Fed) Chair Jerome Powell expresses uncertainty that inflation will return to 2%. Powell anticipates rate cuts at some point this year, emphasizing the careful assessment of incoming data, evolving outlook, and balance of risks. He notes that risks to achieving the dual mandate are moving into better balance.
Technical Analysis: Pound Sterling remains above 1.2700
The Pound Sterling has maintained a tight range over the past two months, particularly in anticipation of the UK’s budget release. The GBP/USD pair is positioned near the downward-sloping border of the Descending Triangle pattern, established on a daily time frame since the high on December 28 at 1.2827. A significant breakthrough above this level could lead to a notable upward movement. The horizontal support of the mentioned chart pattern is traced from the low on December 13, approximately near 1.2500.
Descending Triangle patterns typically reflect indecision among market participants but tend to carry a slight downside bias due to lower highs and stable lows.
The 14-period Relative Strength Index (RSI) is currently at 60.00. A continuation of bullish momentum would be confirmed if the RSI (14) manages to sustain itself above this level.
