March 14 (Reuters) - GBP/USD slipped on Friday, rounding off what has been a week of consolidation, with a surprise contraction in the UK GDP figures -- -0.1% vs 0.1% expected -- providing a fresh reminder that domestic factors for sterling are far from favourable. On the positive side for the pound, cable has continued to ride the coattails of the euro, which received a renewed bid after German parties reached an agreement over major debt package. However, as the UK Budget update draws closer – March 26 -- unwinding sterling exposure is likely to pickup leading into the event. The noise surrounding a fresh set of spending cuts only adds to the bearish sentiment.

Growth has been soft and as a result, the OBR’s 2025 GDP forecast of 2% in October looks certain to be downgraded. The fiscal divergence between the UK and Germany suggests that EUR/GBP higher will be among the better expressions of trading a weaker sterling, with a view to break above 0.8500.

Prior to the budget announcement, however, next week will see the release of the Bank of England’s March decision. While no rate cut is expected, the vote split will be under greater scrutiny following last month’s surprise split, whereby two officials -- Catherine Mann, previously a staunch hawk, and dove Swati Dhingra -- voted to cut the bank rate by 50bps. That said, with the inflation data leaning a touch more hawkish since the prior meeting, officials are likely to largely reiterate their cautious and gradual stance. For cable, 1.30 remains elusive and even if we were to see a break, the aforementioned domestic struggles that the UK faces may well truncate the pair’s ability to sustain such a move above. If anything, a window of opportunity is opening up for a pullback, which could see a retest of the 200-day MA at 1.2792.
GBPUSD daily chart

(Justin McQueen is a Reuters market analyst. The views expressed are his own.)