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  • GBP/USD has been consolidating in recent trade just to the north of the 1.3600 after closing Wednesday trade with small losses.
  • The pair traded largely as a function of the US dollar, which was indecisive as investors weigh whether a Democrat-controlled Congress will be dollar bullish or bearish.

GBP/USD has not seen much of a reaction in recent trade to concerning news that Congress had been stormed by a pro-Trump mob. At the time, Congress had been going through the process of certifying the result of the November 2020 presidential election, when a nearby pro-Trump rally turned violent and stormed the building forcing an evacuation. An 18:00EDT (23:00GMT) curfew has now been imposed in Washington DC.

USD has seen some weakness over the past few hours against the likes of JPY and CHF, but not really versus GBP. Indeed, cable continued to consolidate just to the north of the 1.3600 level, where it has traded for most of the past five or so hours and closed Wednesday FX trade with marginal losses of around 0.1% or just under 20 pips on the day.

Driving GBP/USD today

The main driver of price action in the broader market on Wednesday was of course the surprise Democrat victory in both Senate elections in Georgia on Tuesday, which hands the party control over Congress to go alongside control over the White House. Investors are thus pricing in the likelihood that the Biden administration will be able to implement its agenda over the coming two years, which includes massive additional fiscal spending (and borrowing), likely higher corporate taxes (although this will likely wait until the recovery is on a firmer footing) and tougher regulations on big Tech and energy.

That translated into stock and crude oil market upside along with higher US bond yields, but the reaction in the US dollar has been more mixed. The market seems unsure right now as to whether more US fiscal stimulus in 2021 will be a USD negative or positive (see below for a comparison of some of the most common bullish versus bearish arguments being made).

Elsewhere, a softer than expected US ADP National Employment number was ignored by the US dollar and hardly moved cable, even though it does not bode particularly well for Friday’s official jobs report. ADP estimated that 123K Americans lost their jobs in December 2020 versus expectations for an estimated gain of 88K.

Markets are more forward-looking than usual right now, however, after victory in the two Georgia Senate elections handed the Democrats control over Congress. That means more fiscal stimulus ahead, so markets are likely to look through any Q4 2020/start of Q1 2021 economic weakness in anticipation of stronger growth later in the year.

FOMC minutes add little

The pair was also largely unresponsive to the release of the minutes of the FOMC’s 15-16 December rate decision on Wednesday; the minutes were largely consistent with the meeting and did not hint at any imminent further tweaks to the bank’s asset purchases programme beyond the update to its guidance that was already made back in December. Perhaps the most interesting line, which was on asset purchases, said “a number of participants noted that, once such progress had been attained, a gradual tapering of purchases could begin, and the process thereafter could generally follow a sequence similar to the one implemented during the large-scale purchase program in 2013 and 2014”. Fed’s Bostic hinted that this gradual tapering of purchases could begin as soon as 2021, but other Fed members have pushed back against this and the core members (Jerome Powell, Richard Clarida and John Williams) have not spoken on the topic as of yet.

Bank of England to take rates negative?

GBP was weighed midway through Wednesday’s session on speculation from a former Bank of England insider that the bank might actually “walk the walk” regarding hints that it might take interest rates into negative territory. According to the Bank’s Deputy Governor for Prudential Regulation Sam Woods, the plan is to release research on negative rates in February. Money markets currently price 11.8bps worth of easing by September and 15 bps worth of easing by next August.

Debate on how a Democrat-controlled Congress will impact USD

Bullish arguments

  • Higher government spending will boost US bond yields and then eventually also the US economy in 2021 relative to its peers, increasing the relative attractiveness of the US dollar versus some of its major lower growth, lower-yielding peers (such as EUR, GBP and JPY).
  • Higher US growth in 2021, and perhaps a faster than expected pick-up in inflation, might encourage the Fed to wind down its asset purchase programme sooner than markets are currently pricing, which could see US real yields rising, a USD positive.
  • Congress will now be able to undo US President Donald Trump’s tax cuts on corporations and the wealthy may hike taxes in other areas and are likely to pursue tougher regulations on big Tech and the energy sector (as the Biden administration pursues climate goals). This might well be an equity market negative on balance, which might support safe-haven assets such as the US dollar.

Bearish arguments

  • The faster US economic recovery in 2021 will be driven by US government deficit spending, which will further worsen the US government’s fiscal position and put further upwards pressure on the US’ already historically large trade deficit, factors that could both put downwards pressure on the US dollar.
  • As US national debt balloons under a Democrat-controlled Congress, the Fed will face greater pressure to keep monetary conditions accommodative so that the increasingly indebted US government can actually afford to continue to service its debt. The country’s higher debt load will make it more difficult to eventually raise rates down the road.
  • Given the above-mentioned difficulties the Fed will face in raising interest rates (i.e. not wanting to risk the solvency of the US government), combined with its recently announced average inflation targeting policy (that means the Fed will be willing to tolerate above-target inflation for a time), the Fed is likely to be “behind the curve” in combatting rising inflation (if inflation was to return faster than expected).
  • It’s looking more and more likely that the Fed is going to have an inflation problem, given the recent surge in commodity prices and inflation expectations. If (or when) this starts to show up in the hard data, Fed indifference to inflation risks might pressure the US dollar.

GBP/USD key levels