Pound Sterling (GBP/USD, EUR/GBP, GBP/JPY) Analysis

• Reduced budget deficit reignites calls for tac cuts ahead of the 2024 election campaign
• UK PMI data could add to the EUR/GBP downtrend ahead of tomorrow's release
• GBP/JPY fatigues ahead of major bullish hurdle despite lift from the BoJ
• Download our brand new Q1 pound sterling forecast below:

Reduced Budget Deficit Reignites Call for Tax Cuts Ahead of 2024 Election Campaign

Dates are released today from the office for National Statistics reported that a smaller than expected budget deficit of £7.77 billion was recorded in December, producing the narrowest budget deficit since 2020 and freeing up more room for tax cuts ahead of the 2024 general election.

During last year's Autumn Statement Chancellor Jeremy Hunt announced multiple measures to stimulate growth but appeared at the time to have elected to keep his powder dry in favour of a larger, more impactful reprieve for taxpayers in the spring. Political commentators suggest that a tax cut could be seen as a means for an out-of-favour (according to polls) Tory government to reclaim some lost ground from the Labour party. Tax cuts, if implemented responsibly, will further ease the burden of the cost of living crisis after fuel and energy costs have already dropped considerably.

The date for the general election is yet to be announced but is likely to take place towards the end of the year.

Voting intentions (general election) in the UK from July 2017 to January 2024

Source: Statista

GBP/USD Edges Higher as Markets Await High Importance US Data

Cable continues its general climb higher which hints at finding resistance at 1.2736 where a longer upper wick on the daily candle chart can be seen alongside today's price action which reveals a similar scenario thus far.

The pair has enjoyed a modest decline but price action has broadly been contained within a trading channel highlighted in orange. the 50 day simple moving average appears to have dynamics support for the pair but overall momentum appears to be waning according to the MACD indicator.

The signs of fatigue witnessed at 1.2736 could potentially mark a weekly ceiling if the US economy grew faster than anticipated in the final quarter of 2023 when US GDP data is sue on Thursday. Additionally, the Fed’s favoured measure of inflation (PCE) is due on Friday and given the recent lift in December price readings across developed markets, a hotter than expected result could further strengthen the US dollar, weighing on GBP/USD. Dynamic support at the 50 SMA may come into view, followed by 1.2585. Thus far, economic data has proven ineffective in driving price action out of the current range.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

UK PMI Data Could add to the EUR/GBP Downtrend Ahead of Tomorrow’s Release

EUR/GBP has revealed an early indication of a bearish move outside of the existing triangle pattern. The pair has closed beneath the ascending trendline, previously acting as support, numerous times now and could be given a boost if EU PMI data remains inferior to that seen in the UK when the data is released tomorrow morning.

UK composite PMI data has risen into expansionary territory (>50) while the EU's comparable statistic remains in a contraction, led lower by a struggling manufacturing sector in particular.

Should the bearish momentum continue, the next zone of support emerges at 0.8515, a zone which captured Lowe's in June July, August and September of 2023. Resistance appears at the prior trendline support followed all the way up at 0.8635 where the 200 SMA resides currently.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

GBP/JPY Fatigues Ahead of Major Bullish Hurdle Despite Lift from the BoJ

GBP/JPY trades flat as the London AM session comes to an end but that does not tell the whole story as price action rose around 188.80 but also declined to 187.35 earlier in the day as a result of the Bank of Japan's (BoJ) decision to leave policy settings unchanged.

As far as the pound is concerned, GBP/JPY has shown the most potential to the upside as sterling holds up rather well and the yen has come under pressure after subsequent lower inflation figures have cooled assumptions of an imminent rate hike from the BoJ.

Along with the decisions on monetary policy settings, the Bank of Japan also produced it's quarterly economic forecast where it estimates inflation around 1.9% for 2024, just shy of its 2% target, keeping hopes alive that we may still see that all important rate hike if incoming data suggests that prices will rise above this key level for a lengthy period of time.

188.80 shows a notable level of resistance and is likely to provide a challenge for continued bullish momentum. Speaking of momentum, the MACD indicator remains in favour of upside price action but the RSI, interestingly enough, is very close to overbought territory, suggesting a minor pullback may be in order. Previous pullbacks have been rather short-lived which bears testament to the fundamentals at play. Sterling attracts a superior yield while Japan has witnessed a broad depreciation in its local currency. Support appears all the way down at 184.00 which coincides with the 50-day simple moving average (blue line).

GBP/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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