GBP/USD slides lower ahead of UK budget

The GBP/USD pair was lower on Tuesday but hovers around a one-month high on the back of the trading day’s softer US dollar that was dented at the start of the week due to the market turmoil in the banking sector.

At the time of writing, the GBP/USD pair is trading at 1.2153 and down by some 0.23% after falling from a high of 1.2203 to the 1.2135 low.

On the British front, official data showed that UK pay growth lost pace in the three months to January, welcome news for the Bank of England as it seeks to rein in inflation and a further factor in the mix for its rate-setting meeting next week.

The budget awaited tomorrow will serve as a diversion from the effects of SVB’s failure. Chancellor Hunt won’t be trying to stir up too many controversies in his speech tomorrow in light of the failure of the September 23 mini-budget. Not-as-bad-as-expected UK growth data and tight UK labour market conditions means that the public sector finances have outperformed the predictions of the OBR. So, there might be some leeway for the Chancellor.

Also, there is pressure on the chancellor to raise some public sector employees’ wages. GBP should respond favourably as long as the majority of Hunt’s proposals are designed to encourage investment and productivity without placing additional strain on the public budget. Experts expect the US dollar to recover from this week’s losses and, on a one-month horizon, would look for a move back to GBP/USD 1.19.

The US Consumer Price Index (CPI), which measures inflation, increased 0.4% last month after increasing by 0.5% in January. The CPI rose by 6.0% in the year ending in February, which was a slower rate than the 6.4% annualised growth in January but still more than the Federal Reserve’s 2% target. As a result, the US dollar experienced considerable demand and reached a session high there. But, it has subsequently started to decline as futures prices have begun to reflect a Fed rate decrease by year’s end.

The outlook for this month’s FOMC meeting has changed, according to futures contracts for Fed funds. The odds that the Fed would maintain its current policy at the conclusion of its two-day policy meeting on March 22 are 28,4%, which is just lower than the odds from the day before after the CPI data.