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The fiscal incentives announced by British Finance Minister Jeremy Hunt turned out to be very modest. However, instead of falling, the GBPUSD pair moved up. Why did this happen? Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
During the pandemic, money has been actively distributed in the United States. This has been one of the reasons for the current remarkable resilience of the American economy. However, in the UK, everything is different. Despite the recession in the second half of 2023, the British Treasury did not provide incentives. The reduction in social security contributions and the freeze in duties on fuel and alcohol from Jeremy Hunt did not surprise financial markets but allowed GBPUSD to rise above 1.27.
The Chancellor of the Exchequer supported fiscal restraint by announcing a £10bn stimulus for 27 million workers for the second time since November when the figure of £13bn was mentioned. The £23 billion in total is unlikely to warm up the UK economy but should save it from recession. The Office for Budget Responsibility raised its GDP forecasts for 2024 from 0.7% to 0.8% and for 2025 from 1.4% to 1.9%.
Dynamics of social insurance contribution standards
Source: Bloomberg.
Jeremy Hunt’s actions are easy to understand. Fiscal stimulus was needed to reduce the gap between the ruling Conservative Party and Labor, which is currently about 20 pp. On the other hand, if Hunt were not frugal, it might resemble the situation with the mini-budget from the Liz Truss government. This then caused GBPUSD to crash to an all-time low. At the same time, the risks of early parliamentary elections in May, which the Conservatives would probably lose, would increase.
As a result, expectations of fiscal stimulus coincided with the real situation, which could trigger pound sales. In fact, the market reacted not to Jeremy Hunt’s statement but to the government’s plans to expand bond issuance in the 2024/2025 financial year from £258 billion to £265.3 billion. This is the largest amount since the pandemic.
Dynamics of UK bond supply
Source: Bloomberg.
The Treasury will need money to finance the growing budget deficit, while investors will demand higher returns. The rise in UK debt market rates is good news for GBPUSD bulls.
A new fiscal stimulus from Jeremy Hunt is unlikely to affect the Bank of England’s monetary policy significantly. The market continues to expect a 50 bps interest rate decline in 2024. This is less than the forecast for the Fed of 85 bps and for the ECB of almost 100 bps. The scale of monetary policy easing speaks in favor of buying GBPUSD and selling EURGBP.
Weekly GBPUSD trading plan
In fact, the fate of GBPUSD will depend on whether the US economy cools or remains resilient. The answer will be provided by data on American non-farm payrolls for February. Strong data will become the basis for traders to take profits on GBPUSD long trades entered at 1.26. A weak report will be a reason to add up to long trades in the direction of the previously announced targets at 1.275 and 1.2785.
Price chart of GBPUSD in real time mode
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