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  • GBP/USD has bounced from session lows in the 1.42120s to fresh session highs in the 1.4180s in recent trade.
  • Optimism regarding UK reopening, as well as news the EU might grant limited equivalence to the UK service sector is helping.

Trade has so far been more rangebound than on Wednesday, though GBP/USD has maintained a positive bias, with the pair bouncing from the bottom of this session’s range in the 1.4120s to fresh session highs in 1.4180s in recent trade. GBP bulls will now be hoping for steady grind back towards this week’s highs set during Wednesday’s Asia Pacific session above the 1.4200 mark. At present, GBP/USD trades just over 0.2% or about 35 pips higher on the day, with GBP sitting somewhere around the middle of the G10 FX performance table on the day and, for once, underperforming its euro counterpart by a wide margin.

Driving the day

The main focus of markets on Thursday is again on moves in global bond markets; the taper tantrum, which it seems as though no one is now denying is underway, has continued. UK 10-year government bond yields are up 6bps on the day to just below 0.80%, a rise of more than 30bps since the start of last week. Meanwhile, US 10-year yields are up just over 5bps on the day and have rallied a little over 25bps since the start of last week. Given the move similarity in the magnitude of these moves, yield differentials appear not to be affecting the GBP/USD currency pair too heavily, at least not by anywhere near as much as changing yield differentials are shifting the likes of USD/JPY, USD/CAD, AUD/USD and NZD/USD.

Bank of England officials who spoke earlier in the week have not expressed concern about recent bond market moves and nor did Fed Chairman Jerome Powell or Vice Chairman Richard Clarida. In the same vein, FOMC member Esther George was on the wires only moments ago and stuck to a similar line, saying that the recent rise in longer-term interest rates does not, in her view, justify a monetary policy response. Some might argue that central bankers on both sides of the Atlantic have given the green light for longer-term yields to rally even further.

While bond market machinations and Fed speak on the topic has not impacted GBP/USD much this week, the broadly dovish tone adopted by Fed Chair Powell and other officials does seem to have weighed on the US dollar over the past 24ish hours, with the Dollar Index (DXY) dropping from Asia Pacific highs above 90.10 to current levels and fresh multi-week lows in the 89.70s in recent trade. More broadly, buoyant risk appetite and outperformance in commodities and commodity-linked currencies is another factor undermining the buck.

The above-noted weakness in the US dollar has of course given GBP/USD a boost. But sterling seems, for the most part, to have derived its own strength; focus this week (UK-side) has been on optimism about the UK’s stellar vaccine rollout and UK PM Boris Johnson’s economic reopening plan, which hopes to see most social restrictions lifted by mid-June. On the week, GBP is up 1.2% versus the US dollar and seems to also have garnered some support in recent trades from comments from a French official who said the EU might grant the UK limited financial services equivalence, paving the way for closer financial services trade between the economic regions.  

 

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