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Feb 24 - 10:55 PM

GBP/USD - COMMENT-Sterling Trends Higher, But Faces Potential Pitfalls

By Andrew M Spencer  —  Feb 24 - 09:36 PM

There is little reason to fight sterling's strong uptrend, but it faces a number of risks, including the upcoming UK budget, that could spark a correction.

The pound's strength is driven by the UK's fast COVID-19 vaccine rollout, which underpins hopes of a robust economic recovery nL8N2JU5MQ.

Finance Minister Rishi Sunak is expected to announce further spending to support the economy in his March 3 budgetnL8N2KT6HZ.
He will also outline how the deficit will be financed, and this may impact on sterling.

The Financial Times reports Thursday that Sunak plans to increase UK corporate taxes to possibly 25% from 19%, using U.S. plans for higher business taxes as cover nL4N2KU541.
This would still be
a competitive level, but is likely to cause turmoil within the ruling Conservative Party.

Post-Brexit trade with Northern Ireland also has the potential to undermine sterling. The UK is yet to fully implement the Brexit agreement protocol, but failure to make the system work would cause chaos in Northern Ireland nL1N2KU2T2, and could sour UK negotiations with the European Union in other areas, especially key financial services.

Technically 5, 10 and 21 daily weekly and monthly moving averages trend north. Initial major resistance is at 1.4303, 50% of the 2014-2020 fall, followed by the 1.4377 2018 high.
A close below the 1.3996 rising 10 DMA would signal a deeper correction.

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Source:
Refinitiv IFR Research/Market Commentary

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