GBP/USD has been on the back foot in recent trade and has thus slipped back from multi-year highs set earlier in the session in the 1.4080s. But with the pair still trading in the 1.4060s, it is still holding onto gains of around 0.5% or more than 60 pips on the day. Bulls will be looking for a test of the 1.4100 this week if all goes well.
Driving the day
The UK press is being dominated on Monday by headlines regarding UK PM Boris Johnson’s unveiling of the government’s “Roadmap to recovery” strategy; in a nutshell, there are four stages, each paced at least 5 weeks apart (to ensure the UK’s outbreak doesn’t take a significant turn for the worse), which will see the country gradually reopen and, if all goes as planned, be essentially back to normal by June. While falling infection rates on the mainland imply there is scope for Eurozone countries to ease economic restrictions as well, the bloc’s sluggish vaccine rollout means that they will not be able to do so with the same confidence that this will be the last lockdown.
In other words, (assuming vaccines work, which the data suggests they do) the UK will have most of its adult population vaccinated by the start of summer, meaning a confident reopening without worries of a significant spike in Covid-19 hospitalisations/deaths. The EU is only likely to have 70% of its adult population vaccinated by the end of September, so the need for lockdowns to protect the unvaccinated is much more likely on the mainland. In terms of what this means for GBP; sterling continues to perform well amid ongoing optimism/expectations for a comparatively swift reopening and then economic recovery.
Soft dollar despite usually bullish signals
Turning to the USD side of the equation; it’s been an odd day for the buck. Case in point; the dollar has fallen despite downside in US equities and upside in US bond yields (nominal and real). The former normally give the USD a boost on account of its safe-haven appeal. The latter usually gives the USD a boost by increasing the attractiveness of holding money in US government bonds (which require USD to buy) versus government bonds of other countries.
But this has not been the case on Monday; some market commentators suggested the possibility that early month-end selling might have been in play, after a few major US banks flagged USD sell signals. Others pointed government bond yield rallies in some of the US G10 peers; Australian, New Zealand and Canadian yields have all been on the rise as of late, as have European yields, but not by a significantly greater extent than US yields (or in the case of European yields, by a much lesser extent), so this seems not to be it.
Strength in global commodity prices might also have been a factor weighing on the USD; the Bloomberg Commodity Spot Index just rose to its highest since 2013 amid surging crude oil, Iron ore, copper, precious metal and other commodity prices. Higher commodity prices boost commodity export-dependent currencies such as AUD and NZD at the expense of the buck.
Looking ahead, GBP/USD’s main focus will be on usual themes, such as vaccine rollouts and Covid-19 infection rates. The UK Labour Market Report for January, released at 07:00GMT on Tuesday, will also be closely watched. Meanwhile, heightened attention will be how Fed members react to/interpret the recent move higher in US real and nominal bond yields, as well as on the fact that money markets have now brought forward their expectations for the Fed’s first rate hike to the end of next year, despite the Fed’s current guidance that there will be no hikes through 2023.
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