**GBP/USD Surges Past 1.35 as UK Deficit and Demand-Fed Drama Collide**
*By TradingNews.com*
The GBP/USD currency pair has seen a remarkable rally, surging past the psychological 1.35 threshold, spurred by a combination of stronger-than-expected UK data and swelling speculation on the Federal Reserve’s next moves. Forex traders worldwide are now re-evaluating their positions as novel drivers emerge on either side of the Atlantic, shaping a unique set of risks and opportunities for the world’s fourth-most traded currency pair.
This deep dive explores the principal catalysts propelling the pound higher, the complexities surrounding the UK’s fiscal deficit, and the ever-present influence of the US Fed’s narrative on global US dollar demand. We dissect recent market moves, examine short- and longer-term technical and fundamental factors, and gather expert opinions on what the future may hold for GBP/USD.
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### UK Economic Data Delivers a Pleasant Surprise
The British pound’s ascent has, in large part, been powered by a recent spate of economic data that has confounded bearish forecasts and offered a much-needed boost of confidence to sterling bulls.
#### Key UK Data Highlights:
– **Retail Sales:** Monthly figures rebounded with a 0.7% increase, outpacing consensus expectations of just 0.3%.
– **Unemployment:** The jobless rate held steady at 3.9%, while wage growth reached its highest level since the start of the year.
– **Purchasing Managers’ Index (PMI):** Both manufacturing and services PMIs nudged above the 50.0 mark, signaling expansion for the first time in multiple quarters.
– **Inflation:** UK CPI data revealed a moderation in headline prices, but core inflation remains notably sticky, above 4%.
Economists at major UK banks now anticipate the possibility that the country may avoid a technical recession in 2024 if these trends continue. Sterling’s rally hints at a reversal of the widespread pessimism that plagued the currency last year, when concerns over growth and post-Brexit trade weighed heavily on sentiment.
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### The UK’s Widening Deficit: A Double-Edged Sword
One risk factor that could soon come to the fore is Britain’s fiscal deficit. The latest numbers show the UK government borrowing an additional £21.6 billion in the last quarter, the highest since the aftermath of the pandemic.
#### Drivers Behind the Deficit:
– **High Public Spending:** Persistent healthcare and energy subsidies have stretched government finances.
– **Sluggish Tax Receipts:** Despite better employment numbers, growth in income tax and VAT receipts has lagged.
– **Interest Payments:** Rising yields on UK Gilts have driven up the cost of servicing the national debt.
While some traders argue the deficit is a red flag that could undermine the pound in the medium term, others counter that as long as economic growth outpaces debt accumulation, the risk is manageable. If recent positive data translates into higher tax take and reduced welfare outlay, pressure on the deficit could abate.
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### US Dollar Demand and Fed Uncertainty
No analysis of GBP/USD can be complete without accounting for the US side of the equation. Over recent weeks, the dollar has drifted as investors speculate about the Federal Reserve’s timing on future rate cuts.
#### What’s Driving the USD:
– **Fed Mixed Messages:** St. Louis Fed President remarks suggested “patience,” while minutes from the last FOMC meeting reflected division among policymakers.
– **Softening US Inflation:** Recent CPI and PPI prints indicate US inflation is cooling, emboldening dovish bets.
– **Resilient Labor Market:** Still-low jobless claims and robust nonfarm payrolls challenge the idea of an imminent Fed pivot.
The result is a volatile USD, with large intraday swings in response to policy rumors or data releases. The “demand-Fed drama,” as dubbed by market commentators
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