GBP/USD, UK Fiscal Stimulus, and Euro’s Rising Popularity.

• GBP/USD exchange rate broke above 1.2700 after weaker-than-expected US data, reaching 1-month highs at 1.2730.
• Key events on Wednesday, including the UK budget announcement and Fed Chair Powell’s testimony, will influence GBP/USD’s movement.
• US ISM non-manufacturing index declined to 52.6 for February, below consensus forecasts, introducing uncertainty about the US economy.
• Anticipation of UK fiscal stimulus is driving optimism, with expectations of tax cuts and upward pressure on UK bond yields.
• The euro is gaining popularity among central bank reserve managers, with approximately one in five surveyed anticipating increased euro holdings over the next two years, reflecting a growing net demand for the currency.

GBP/USD Exchange Rate Surges Above 1.2700 on Weak US Data

Ahead of Tuesday’s New York open, the Pound to Dollar (GBP/USD) exchange rate showed a drifting pattern before finally breaking above the crucial 1.2700 level. Following slightly weaker-than-expected US data, GBP/USD soared to 1-month highs, reaching 1.2730 and maintaining its gains. The focus now shifts to key events on Wednesday, including the UK budget announcement and congressional testimony from Fed Chair Powell. Positive developments could propel GBP/USD to challenge the 1.2825 mark. Notably, the US ISM non-manufacturing index dipped to 52.6 for February, below consensus forecasts, triggering fresh uncertainty around the US economy and prompting gains in Treasuries.

UK Fiscal Stimulus Anticipated to Boost Pound’s Performance

The anticipation of UK fiscal stimulus is driving optimism among market participants, with UK bond yields likely to rise in response to any stimulatory measures. The upcoming Spring Budget is seen as a potential catalyst for further cyclical outperformance in GBP. While budget events typically pose low risks for financial markets, the memory of past mishandlings, such as the Liz Truss budget of 2022, looms large. However, with room for tax cuts estimated at about £13 billion, thanks to lower debt interest payments, and reports suggesting a 2p cut to National Insurance contributions, fiscal headspace appears to have assuaged concerns, potentially adding upward pressure to UK rates.

Euro Gains Popularity Among Central Bank Reserve Managers

The euro is experiencing a resurgence in popularity among central bank reserve managers, buoyed by positive rates and geopolitical shifts challenging the dominance of the dollar. Approximately one in five central banks surveyed by the OMFIF think-tank anticipates increasing euro holdings over the next two years, reflecting a net demand higher than for any other currency. The euro’s shift to positive yielding assets, particularly after the European Central Bank’s exit from negative interest rates in 2022, has prompted reserve managers to reconsider their currency allocations. As the euro’s appeal grows, some central banks are adjusting their reserves accordingly, with notable plans to increase euro holdings and maintain target weights in their reserves.