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  • GBP/USD trades just below the 1.3850 mark, not far from session highs in the 1.3860s.
  • Sterling is a G10 outperformer and remains underpinned by a positive UK fundamental backdrop.

GBP/USD trades just below the 1.3850 mark, not far from session highs in the 1.3860s. The pair has been one of the better performing G10/USD majors on the day as the fundamental backdrop underpinning GBP remains positive. Meanwhile, USD is mixed versus its G10 counterparts, with softer than expected Consumer Price Inflation data for January doing little to help. At present, the pair trades with gains of around 0.2% or 30 pips on the day.

Driving the day

Not much to update on with regards to UK fundamentals on Wednesday; sterling remains underpinned by the UK’s comparatively rapid vaccine rollout that is hoped to facilitate an earlier than its peers easing of lockdown restrictions last in the year. Various separate reports from the UK press have been circulated in recent days talking of how the UK might ease restrictions on the hospitality sector in April. Meanwhile, fiscal support for employers is set expected to be extending by the UK Finance Minister at the start of March in the release of the updated budget.

Elsewhere, GBP might derive some support later on in the session from a speech from Bank of England Governor Andrew Bailey; as a reminder, in the bank’s monetary policy decision last Thursday, the bank added negative interest rates to its toolbox but was keen to urge to the market that this change in its toolbox should not be seen as a signal as to future changes in its monetary stance. Bailey is likely to reiterate this on Wednesday. More broadly, the case for more BoE stimulus is becoming weaker and weaker amid growing expectations for a strong, vaccine driven economic recovery later in the year.

The USD side of the equation has been much more interesting on Wednesday; a debate amongst high profile US economists raged over the weekend over whether US President Biden’s $1.9T stimulus package would cause the US economy to overheat later in the year/in 2022. Wednesday’s softer-than-expected inflation reading of course does not answer this question; the US economy suffered as a result of the worst wave of Covid-19 infections thus far during the pandemic in January and this naturally weighed on prices.

Softness in prices in January thus does not say much about where prices are going later in the year/in 2022, but did trigger some minor downside in the US dollar; the longer inflationary pressures remain subdued, the more justification the Fed has to continue its ultra-accommodative monetary policy stance.