Pound Sterling trades with caution ahead of UK Spring Statement
- The Pound Sterling is expected to remain volatile as UK Reeves is scheduled to deliver the Spring Statement on Wednesday.
- Investors will also focus on the UK CPI data for February, which will influence the BoE’s policy outlook.
- Upbeat preliminary US S&P Global PMI data for March has strengthened the US Dollar.
The Pound Sterling (GBP) trades cautiously against its major peers on Tuesday. The British currency struggles as United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves is prepared to unveil the Spring Statement on Wednesday.
It would be interesting to watch how Reeves will promote economic prosperity, given his pledge of no more taxes and the maintenance of fiscal rules.
After the Autumn Budget, Chancellor Reeves told at the Confederation of British Industry (CBI) conference in November that public services have to survive on their own means. Reeves clarified that the government will rely on foreign financing only for investment purposes, not to address day-to-day spending. Also, she confirmed no more tax raises after facing backlash from the corporate sector for increasing employers’ contributions to National Insurance (NI) from 13.8% to 15%. This indicates that Reeves will be forced to cut fiscal spending heavily.
Such a scenario would diminish consumer inflation expectations, prompting expectations of more interest rate cuts by the Bank of England (BoE) in the near term.
On Wednesday, investors will also focus on the UK Consumer Price Index (CPI) data for February, which will influence market expectations for the BoE’s monetary policy outlook. The headline inflation is estimated to decelerate to 2.9% year-over-year (YoY), slower than the 3% increase seen in January. In the same period, the core CPI – which excludes volatile food and energy prices – is estimated to have grown by 3.6% from the prior reading of 3.7%.
Daily digest market movers: Pound Sterling edges lower against US Dollar
- The Pound Sterling ticks lower against the US Dollar (USD) near 1.2915 in European trading hours on Tuesday. The GBP/USD pair faces slight selling pressure as the US Dollar holds onto Monday’s gains, driven by strong preliminary United States (US) S&P Global Purchasing Managers Index (PMI) data for March and optimism that tariffs to be unveiled by President Donald Trump on April 2 would be narrower in scope than initially feared.
- The S&P Global reported on Monday that the Service PMI, which accounts for activities in the services sector, came in at 54.3, significantly higher than estimates of 51.2 and the 51.0 reading seen in February. Given that the services sector roughly accounts for two-thirds of the US economy, upbeat data indicates a strong business outlook. The report also showed that the increase in prices paid by employers for business inputs was the highest in nearly two years, prompting expectations of higher inflation in the near term.
- The Manufacturing sector output declined unexpectedly, but sentiment remained robust on expectations that US President Trump’s tariff policies will prompt the appeal of goods produced domestically.
- On Monday, President Trump reiterated that reciprocal tariffs are on track to be unveiled on April 2 but teased that a lot of countries could get exempted from additional levies. His comments improved the US Dollar’s appeal as the impact of the tariff war with fewer nations would be lower on the US economic outlook than initially feared.
Technical Analysis: Pound Sterling drops to near 1.2900
The Pound Sterling trades slightly lower near 1.2900 against the US Dollar on Tuesday. The GBP/USD pair struggles to hold the 61.8% Fibonacci retracement, plotted from the late-September high to mid-January low, at 1.2930.
Advancing 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2865 and 1.2728, respectively, suggest that the overall trend is still bullish.
The 14-day Relative Strength Index (RSI) cools down to near 60.00 after turning overbought above 70.00 last week. Should a fresh bullish momentum come into action if the RSI holds above 60.00.
Looking down, the 50% Fibonacci retracement at 1.2770 and the 38.2% Fibonacci retracement at 1.2615 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 will act as a key resistance zone.
Pound Sterling FAQs
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, also known as ‘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).
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.
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.
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.