**GBP/USD Price Forecast: Sterling Holds 1.35 as Fed Pivot Offers Relief Amid UK Fiscal Strain**
*By TradingNews.com Staff*
The British pound remains resilient, trading steadily above the 1.35 level against the US dollar, as investors digest the latest Federal Reserve pivot and assess growing fiscal challenges in the UK. Amid a backdrop of policy shifts and economic headwinds, the GBP/USD pair has attracted investor attention thanks to its volatility and sensitivity to macroeconomic catalysts. This in-depth analysis explores the factors underpinning sterling’s current performance, the outlook for the Federal Reserve, the strain on UK government finances, and what traders should watch in the coming weeks. Credit for this analysis goes to the original author as published on TradingNews.com.
## The Sterling’s Stubborn Hold on 1.35
The GBP/USD exchange rate has weathered significant turbulence in 2024, most recently stabilizing above 1.35 despite global uncertainty. This resilience stems from a combination of factors, including shifting monetary policy expectations, comparative economic data, and evolving risk sentiment.
Key factors underpinning the pound’s resilience:
– Signs of slowing US inflation prompted a dovish pivot from the Federal Reserve, easing upward pressure on the US dollar.
– UK data, though uneven, has shown pockets of strength, particularly in wage growth and services activity.
– Markets remain wary of aggressive policy tightening in the US, which has supported risk appetite for major currencies like sterling.
## Federal Reserve Pivot: Easing the Dollar’s Grip
Following several months of aggressive rate hikes, the Federal Reserve has recently signaled a more measured approach to tightening. At its June meeting, the Fed held rates steady, citing persistent, though moderating, inflationary pressures. Fed Chair Jerome Powell’s remarks suggested a willingness to consider data-dependent policy moves, reducing the likelihood of further near-term rate hikes.
Key developments from the Fed:
– Policymakers signaled that rates are near their peak, with markets now pricing in potential rate cuts in late 2024 or early 2025.
– The US dollar, which had benefitted from the Fed’s hawkish stance, has moderated, boosting risk-sensitive currencies like the pound.
– Improved risk sentiment has encouraged capital flows into higher-yielding assets, including UK gilts and equities.
For GBP/USD, the Fed’s dovish tilt has helped limit dollar appreciation and provided the pound with breathing room above the 1.35 threshold.
## UK Fiscal Outlook: Mounting Strains
Contrasting with the more dovish Fed, the UK faces mounting fiscal pressures as government borrowing remains elevated and political uncertainty looms. The government’s recent fiscal stance, marked by higher spending and less aggressive deficit reduction, has raised investor concerns about long-term debt sustainability.
Notable challenges to the UK fiscal landscape:
– Government borrowing for 2024 is on track to exceed initial forecasts, driven by social spending, energy subsidies, and slower-than-expected tax revenue growth.
– The Office for Budget Responsibility (OBR) now projects UK public sector net borrowing at over 4 percent of GDP for the fiscal year, up from earlier estimates.
– Recent polling and the prospect of a General Election have injected additional uncertainty, limiting appetite for far-reaching fiscal consolidation.
Despite these headwinds, UK bond yields remain in the middle of their recent range, indicating that investors are watchful but not yet panicked by fiscal risk.
## Economic Data: Mixed Picture for Pound Bulls
Sterling’s near-term direction will depend heavily on the resolution of mixed incoming economic data. So far in 2024:
– UK inflation has moderated, but remains above the Bank of England’s 2 percent target, complicating the central bank’s rate-cut calculus.
– Wage growth remains robust, providing a floor under household consumption but risking entrenchment of inflationary pressures.
– The services sector, a key engine of the UK economy, has outperformed manufacturing, supporting a modest recovery in GDP.
Upcoming data
Read more on GBP/USD trading.