GBP/USD bulls meet resistance near 1.2200 ahead of UK budget

GBP/USD was lower on Tuesday but hovers around a one-month high on the back of a soft 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, GBP/USD is trading at 1.2165 and down by some 0.14% after falling from a high of 1.2203 to a low of 1.2135 so far. 

On the domestic 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.

Meanwhile, for GBP, tomorrow’s budget will provide a diversion from the fallout from the collapse of SVB. ´´Following the debacle of the September 23 mini-budget, Chancellor Hunt will not be looking to ruffle many feathers in his speech tomorrow.  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.  The Chancellor may therefore have a little wiggle room,´´ analysts at Rabobank explained. 

´´The Chancellor is also under pressure to increase pay for some public sector workers.  As long as the bulk of the measures announced by Hunt are aimed at supporting productivity and investment without added to the strain on public finances, GBP should react well,´´ the analysts added. ´´ The break above the 50 day sma at 1.2135 is a bullish near-term signal.  That said, we see room for the USD to reverse this week’s losses and would look for a move back to GBP/USD1.19 on a 1 month view,´´ the Rabobank analysts explained. 

Elsewhere, in the US, inflation data in the US Consumer Price Index (CPI) rose 0.4% last month after accelerating 0.5% in January. In the 12 months through February, the CPI increased by 6.0%, a slower pace than the 6.4% annualized gain in January, however, this was still above the Federal Reserve's 2% target. Consequently,  the US Dollar found some demand and made a session high in the US but it has since turned lower while futures priced in a Fed rate cut by year's end.

Fed funds futures show a change in sentiment with regard to this month's FOMC meeting. However, the CME´s Fed Watch Tool shows a 28.4% likelihood the Fed would stand pat at the end of its two-day policy meeting on March 22, slightly down from the prior day following the CPI data.