Spring Budget potential impact on GBP/USD

The market is waiting for the Spring Budget announcement which is expected to have more weight than usual due to the upcoming elections, as Chancellor Jeremy Hunt and Prime Minister Rishi Sunak are more interested than ever to impress voters. Hunt previously expressed his intention to cut taxes in the Spring Budget.

The event is scheduled to start at 12:30 p.m. GMT.

The market is now more cautious about the BoE’s decision to cut rates compared to last autumn when the Treasury’s “headroom” was estimated at £13bn. The headroom is the money that could in theory be spent or given away in tax cuts while still meeting the government’s main fiscal goal of debt falling as a percentage of GDP in five years’ time.

The market now expects the BoE’s rate cut cycle to start in October, which would impact the headroom as the Bank Rate affects the size of future debt interest payments. ING analysts anticipate that Hunt’s headroom has grown to £18bn since the last estimation in November, but this is lower than their previous expectation that it would double, so Hunt has a smaller buffer to work with.

GBP/USD expectations

On the H1 chart, from a technical perspective, GBP/USD looks good for buying opportunities.

GBP/USD strengthened since the beginning of the week, but didn’t break through the 1.2730 level of resistance and is now having a correction, which could be bigger since a bearish divergence seems to be forming.

On the H4 chart the next resistance levels are at 1.2760 and 1.2785. On the downside the next levels of support are at 1.2665, 1.2610 and 1.2545.

Today’s events like the U.K.’s Spring Budget and Fed Chair Powell’s semi-annual testimony in Congress could impact the pair’s direction. The most likely scenario is that Powell will reiterate that there’s no rush for the Fed to cut rates and that more evidence is needed that inflation is going in the right direction.