**GBP/USD Price Forecast: Sterling Holds Above 1.35 as Fed Pivot Eases UK Fiscal Strain**
*Original reporting by James Linton, TradingNews.com*
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The British pound sterling (GBP) has demonstrated remarkable resilience against the United States dollar (USD) in the opening weeks of 2024, steadfastly maintaining its position above the psychologically significant 1.35 level. Currency traders and market analysts have closely watched this pairing amid a complex international backdrop comprising a pivotal shift by the Federal Reserve (Fed), fresh signals from the Bank of England (BoE), and persistent fiscal concerns facing the United Kingdom. As global monetary policy recalibrates in response to softening inflation and slower economic momentum, the GBP/USD cross finds itself at the intersection of shifting interest rate differentials and structural economic challenges.
This article delves into the core drivers anchoring sterling’s current strength, evaluates the impacts of a perceived Fed pivot, examines the underlying fiscal strains in the UK, and sets out potential technical and fundamental scenarios for the GBP/USD currency pair over the coming months.
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**Federal Reserve Pivot Alters Dollar Trajectory**
– The December 2023 meeting of the U.S. Federal Reserve became a turning point for FX markets after Chair Jerome Powell indicated that the era of aggressive monetary tightening may be drawing to a close.
– Headline U.S. inflation, measured by the Consumer Price Index (CPI), cooled faster than anticipated, prompting the Fed to signal a likely pause and possible reversal in its rate hiking cycle.
– As markets began to price in rate cuts for late 2024, the U.S. dollar index, which tracks the greenback against major peers, retreated from multi-year highs.
– For GBP/USD, this shift lessened upward pressure on USD and created a more favorable setting for sterling, with relative rate outlooks narrowing.
**Key Points on the Fed’s Impact:**
– Futures markets currently imply at least two 25 basis point Fed cuts by the end of 2024.
– U.S. Treasury yields softened on expectations of easier financial conditions.
– The dollar’s safe-haven bid, potent in 2022 and much of 2023, receded as risk appetite returned.
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**Bank of England Stance Bolsters Sterling**
While the U.S. central bank leans dovish, the Bank of England has maintained a cautious tone amid lingering UK inflation and elevated wage growth:
– Latest BoE communications show the Monetary Policy Committee (MPC) remains vigilant over inflation risks, even as headline CPI readings gradually decline.
– Governor Andrew Bailey and his colleagues have warned of “persistent” domestic price pressures from the tight labor market.
– Money markets continue to expect the BoE to keep Bank Rate at 5.25% into mid-2024, with only tentative cuts priced beyond then.
– This divergence from the Fed’s dovish tilt has provided a pillar of support for sterling, encouraging carry trades and underpinning the currency’s outperformance.
**Sterling Support Factors:**
– Elevated UK interest rates compared to eurozone and (prospectively) U.S. rates.
– Growing conviction that the BoE will lag counterparts in easing monetary policy.
– Foreign capital inflows seeking yield advantage.
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**UK Fiscal Concerns Remain, but Markets Show Resilience**
– Despite sterling’s stability, investors remain acutely aware of the UK’s fiscal position, which has deteriorated over recent years due to pandemic-era spending, energy support packages, and sluggish growth.
– The UK’s public sector borrowing requirement has surged, with national debt ratios now approaching 100% of GDP.
– Chancellor Jeremy Hunt’s Autumn Statement provided little room for broad fiscal easing, focusing instead on incremental tax adjustments and spending restraint.
– Nevertheless, the relative calm in gilt yields and moderate demand at bond auctions suggest global investors currently view UK sovereign risk as manageable.
**UK Fiscal Headwinds:**
– Structural budget deficit remains wide, limiting government’s ability to offset economic shocks
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