In the European session on Tuesday, the Pound Sterling (GBP) experienced a slight decline from the critical resistance level of 1.2700 against the US Dollar (GBP/USD). The pressure on the pair is attributed to waning investor risk appetite and uncertainty looming over the United Kingdom’s Spring budget, set to be revealed by Chancellor Jeremy Hunt on Wednesday.
Chancellor Hunt faces the delicate task of balancing fiscal measures against the backdrop of a persistent inflation outlook and deteriorating growth forecasts in the UK. Speaking on Sunday, Hunt emphasized a responsible and prudent approach to tax cuts, acknowledging the challenging economic climate.
The potential limited scope for tax cuts raises concerns about early rate cuts by the Bank of England (BoE), a scenario that could exert downward pressure on the Pound Sterling.
Simultaneously, the cautious market sentiment ahead of Federal Reserve Chair Jerome Powell’s congressional testimony on Wednesday, coupled with a series of key US economic data releases this week, has provided some relief for the US Dollar.
Investors are closely monitoring today’s release of the final S&P Global/CIPS UK Services PMI at 09:30 GMT, alongside the US S&P Global and ISM Services PMIs scheduled for 14:45 GMT and 15:00 GMT, respectively.
Pound Sterling Faces Headwinds Amid Cautious Market Mood
The Pound Sterling retreats from the pivotal resistance level of 1.2700, reflecting market caution ahead of the UK’s Spring budget announcement and a busy US economic calendar.
All eyes are on Chancellor Jeremy Hunt’s Spring budget, with a potential signal of increased fiscal stimulus through tax cuts, a reduction in national insurance rates, and substantial public spending plans potentially dampening hopes for early rate cuts by the Bank of England.
Expectations suggest the Conservative government’s strategy will lean towards stimulating growth to prevent a recession, although a significant stimulus package is not anticipated.
BoE policymakers, acknowledging a shallow technical recession in the latter half of 2023, express confidence in the economy’s return to growth, backed by improving Retail Sales and PMIs. However, vigilance is urged to ensure sustained recovery.
On the flip side, limited fiscal measures could heighten the possibility of early rate cuts by the BoE, with market expectations pointing towards a potential start in August, coinciding with the projected return of inflation to the 2% target.
Meanwhile, the US Dollar rebounds, showing resilience near 103.70 after reaching a two-day low. Cautious sentiment prevails ahead of Federal Reserve Chair Jerome Powell’s congressional testimony and key US economic data releases.
Powell is anticipated to caution against premature rate cuts, emphasizing the need for more evidence to support a return to the 2% inflation target.
Technical Analysis: Pound Sterling’s Struggle to Recapture 1.2700
The Pound Sterling faces a critical juncture near the downward-sloping border of the Descending Triangle pattern on the daily timeframe, formed since December 28. A decisive break above could trigger a significant upside move, with horizontal support from the same pattern marked near 1.2500.
While the Descending Triangle pattern typically suggests indecisiveness, the presence of lower highs and flat lows introduces a slight downside bias.
The 14-period Relative Strength Index (RSI) reflects sharp volatility contraction, oscillating within the 40.00-60.00 range, indicative of potential market uncertainty.
