Sterling Becalmed As Spring Budget Looms

British Pound Forecast: Neutral

• Sterling’s implied volatility has fallen as the UK economy seems less of an outlier
• This has resulted in narrow-range trade for GBP/USD
• This might just break in the coming week, but maybe not for long

The British Pound remains confined to narrowing ranges against the United States Dollar in a market where volatility has plummeted.

Indeed, implied volatility for Sterling is reportedly close to thirty-year lows as monetary policy expectations for the UK move more into line with those for the US and Europe. The Pound had formerly been a bit of an outlier as its domestic economy struggled with much higher inflation than its industrialized peers. However, now, while the Bank of England is expected to loosen monetary policy later and more cautiously than the Federal Reserve, it’s not tipped to be anything like as far behind the Fed as many feared at the start of this year.

To be sure the UK’s economic performance has been anemic. But the signs are that the recession entered at the end of last year will prove unusually shallow and that modest growth will be seen in this quarter. In essence the country has not performed as badly as many feared it might.

The coming week will bring two major events for GBP/USD, one from each side of the pair. On March 6 UK Chancellor of the Exchequer Jeremy Hunt will reveal his spring budget, possibly the last piece of scheduled fiscal theatre before a General Election, although one has yet to be called. With support for the ruling Conservative Party collapsing in the polls, some last-ditch tax cuts may be in the offing, even though doubts remain over how much fiscal headroom the government has for such largesse. Both main parties have committed to fiscal discipline, which may also account for some of the calm around Sterling, but the focus of Hunt’s plans may well move the Pound. A cut in income tax would be the boldest move, but markets may not like that much given the clear public spending pressures in the UK.

Markets will have to wait until Friday for the next major event, the release of official US labor statistics for February. The unemployment rate is expected to remain steady at 3.7%, with nonfarm payrolls tipped to have expanded by 188,000. Recall though that last month’s blockbuster 353,00 saw rate-cut expectations in the US pushed back. Markets will be on watch in case history repeats itself.

GBPUSD Technical Analysis

GBP/USD Daily Chart Compiled Using TradingView

GBP/USD has clearly traded a smaller range into 2024, with the previous broad band established in late November last year narrowing considerably.

The Pound now looks stuck between February 7’s intraday low of 1.25174 and February 23’s high of 1.27133. There’s retracement support at 1.24936 waiting to catch any moves below the current range base, with February 1’s peak of 1.27563 offering resistance to any upside break, ahead of the former range top of 1.28231.

It’s perhaps notable that the Pound retreated quite briskly this week once the psychological 1.2700 handle had given way. However, it hasn’t retreated very far below that line and this market, like many other foreign exchange pairs, seems in need of a new story.

It might just get one this week, but, as that’s far from certain. So it’s got to be a neutral call given that sharp fall in volatility.

–By David Cottle for DailyFX