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  • GBP/USD dipped as low as the 1.3670s but is now consolidating above 1.3700 again.
  • Cable was driven by the USD side of the equation on Friday, which moved in tandem with US bond yields.

GBP/USD saw a brief spell of weakness early on during European hours, dipping as low as the 1.3670s, but has recovered modestly in recent trade and looks likely to close out the week just above the 1.3700 big figure. Support in the form of the 25 March low came in handy, it seems. Perhaps this will be the start of a longer-term double bottom. Conversely, if cable continues to suffer in the coming week and breaks below support in the 1.3670s, that could open the door for an extension of the selling pressure towards the next major area of support around 1.3570.

Driving the day

Cable was predominantly driven by the USD side of the equation on Friday, rising in tandem with a rise in US government bond yields (10-year yields peaked at 1.68%) before sliding as yields came under pressure again (10-year yields falling back under 1.65%) and now consolidating as bond market price action calms (10-year yields consolidating either side of 1.65%). Fundamental developments took a back seat in terms of the price action. Out of the UK, there was not a great deal of news.

In the UK, the vaccine rollout continues to go well and infection rates remain low, with country on track to reopen a large part of its economy at the start of next week. Focus now is on travel to and from the UK; the government’s travel task force will announce early next month which countries will be included in the red, amber, or green categories as part of a new traffic light system based on virus risk, and the task force will also confirm if international travel can resume from 17 May as is currently planned. At the moment, traveling for holiday is illegal and all must have a “valid reason” for leaving the country if they plan to return.

Turning to the US, there is more to talk about, but just as was the case with UK news, not anything that really had much of a notable impact on the price action in FX markets. The March Producer Price Inflation report for the month of March was released on Friday; the YoY rate of PPI was 4.2% in March (its highest since September 2011), a jump of 1.4% from February and well above expectations for a reading of 3.8%. The Core PPI was also higher than expected, rising to 3.1% YoY from 2.5% in February, above expectations for a 2.7% reading. According to ING, the latest PPI report adds upside risk to next week Consumer Price Inflation (CPI) report (also for the month of March).

They expect CPI to come in at 2.4% YoY in March, but then to rise towards 4.0% over the summer “as prices in a vibrant, re-opened, stimulus fuelled economy contrast starkly with those of twelve months before when the economy was largely in lockdown”. The bank disagrees with the Fed, who thinks that inflation will then moderate; “we think that pandemic-related scarring and supply constraints will keep inflation elevated for longer than they do”. ING conclude that “inflation could stay closer to 3% for much of the next couple of years and in an environment of strong growth and rapid job creation it adds to our sense that risks are increasingly skewed towards a late 2022 rate hike rather than 2024 as the Fed currently favours”.

Elsewhere, various Fed speakers have been on the wires on Friday, though not with much impact on FX markets. Fed Vice Chair Richard Clarida stuck to the usual dovish script and echoed Chairman Jerome Powell’s remarks on Thursday, saying that the Fed wants to see “actual” progress towards its goals before tightening policy. He also played down concerns about inflation, highlighting that while next week’s CPI inflation reading is likely to be high, this is likely a “transitory” increase in prices. However, he did add something new compared to what Powell has said on inflation, saying that if inflation has not declined by the end of the year, it may no longer qualify as transitory. On the recent labour market data, he welcomed the strength but reiterated the Fed’s stance that there remains a long way to go.

Separately, one of the more hawkish Fed members Robert Kaplan also gave remarks. Kaplan noted lingering concerns about the impact of the Covid-19 and the dangerous of variants, but said that once the pandemic storm has been weathered, he wants to err on the side of removing extraordinary policy measures sooner rather than later (i.e. by the sounds of it, Kaplan will be one of the soonest to push for QE tapering). For reference, Kaplan is one of the FOMC members predicting a rate hike by the end of 2022.

Looking ahead, the main event for USD traders to focus on next week will be the US March Consumer Price Inflation report, though the US March Retail Sales report will also likely be a market mover. A few Fed speakers are also scheduled and should be taken note of. GBP traders, meanwhile, ought to be on notice for a speech from dovish BoE member Tenreyro on Monday, followed by a hefty dose of February hard data, including the monthly GDP growth estimate, on Tuesday.