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

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• 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.

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• 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.

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• 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. 

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• 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.

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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.