**GBP/USD Price Forecast: Sterling Holds 1.35 as Fed Pivot Offers UK Fiscal Strain Relief**
*By TradingNews.com Staff Writer*
The British pound has managed to sustain its position above the 1.35 level against the US dollar, as evolving monetary dynamics in the US intersect with ongoing fiscal challenges in the UK. With Federal Reserve policy signaling a potential pivot, markets are reassessing the risk landscape, providing Sterling with a momentary reprieve from its recent depreciation. As investors react to shifting rate expectations, the interplay between UK fiscal pressures and US monetary policy is central to the near-term GBP/USD outlook.
## Sterling’s Resilience Above 1.35
The GBP/USD currency pair, often regarded as a barometer of transatlantic economic and policy divergence, has steadied above 1.35 in early 2024. This stabilisation follows a period of intense volatility sparked by both macroeconomic and political developments, especially concerning the UK’s fiscal direction and the Federal Reserve’s evolving policy stance.
Factors contributing to pound resilience include:
– **Easing Dollar Strength**: Diminished speculation about aggressive US rate hikes due to mixed economic data.
– **UK Yields and Policy Response**: Continued efforts by the Bank of England to anchor inflation, providing some support for the pound.
– **Fiscal Announcements**: UK government signals about fiscal restraint have helped reduce fears of ballooning deficits undermining the pound.
## Federal Reserve Pivot: A Game Changer
Recent communications from the Federal Reserve have indicated a possible shift away from its aggressive hiking posture. Markets had anticipated further tightening, but softer inflation prints and slower job growth have prompted a recalibration.
### Key Developments
– **Pausing Rate Hikes**: The Fed’s December and January policy statements emphasized data dependency instead of a rigid tightening schedule.
– **Disinflation Trend**: US headline and core inflation have shown tangible signs of moderating, providing the Fed with credibility to pause.
– **Financial Conditions**: Tighter credit, banking sector caution, and softening consumer demand point to less need for further policy restriction.
### Impact on GBP/USD
Sterling often weakens when the Fed is raising rates aggressively, given the appeal of US yields. However, as US monetary policy pivots, the dollar’s broad-based strength wanes, and risk sentiment improves. This environment typically provides space for currencies like the pound to recover, assuming domestic factors do not dominate.
## UK Fiscal Strain: Headwinds Persist
Despite the lift from global monetary developments, Sterling remains vulnerable to ongoing domestic challenges. The UK government faces significant fiscal strain in 2024 due to multiple factors:
– **Rising Debt Servicing Costs**: Higher interest rates have increased the cost of servicing the UK’s elevated public debt.
– **Sluggish Growth Outlook**: Economic expansion forecasts have been revised lower, with GDP growth struggling to break out of a stagnation phase.
– **Inflation-Driven Expenditure**: Welfare and energy subsidy spending remain higher than pre-pandemic baselines, stressing public finances still reeling from pandemic-era stimulus.
– **Taxation Dilemmas**: While some ministers call for tax relief to spur growth, others urge prudence to preserve fiscal credibility.
### Market Perception
Investors closely monitor UK fiscal policy for signs of profligacy or discipline. Deteriorating fiscal credibility, as seen during the brief Liz Truss premiership, can trigger rapid pound depreciation and a spike in gilt yields. For now, reassurances from Chancellor Jeremy Hunt and other officials signal intent to restore fiscal balances over time, lending some confidence to currency markets.
## Inflation and the Bank of England
UK inflation has been another key variable influencing currency dynamics. While the pace of price rises has slowed compared to its 2022 peak, it remains above the Bank of England’s 2 percent target, keeping monetary policy expectations in focus.
### Current BoE Stance
– **Con
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