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  • Early resilience in GBP/USD has faded in recent trade, with a stronger dollar driving the pair to the low 1.3700s.
  • Higher yields and strong data are helping the buck, but GBP is holding up better than some G10 currencies.

Early resilience in GBP/USD (the pair was holding above 1.3750 in early European session trade) has faded since the arrival of US market participants and the pair has now slipped into the low-1.3700s. On the session, that means the pair is down by about 0.3% or close to 40 pips.

Technically speaking, things look bearish for cable; after breaking below the 50-day moving average back on 23 March, GBP/USD retested but was unable to break back above this key level of resistance at the start of this week – the classic break and retest! Unsurprisingly then, after it failed to break back above the 50DMA (which currently resides in the 1.3830s), the pair has been on the back foot and short-term bears will be looking for a move back to monthly lows in the 1.3670s.

Driving the day

A pick-up in US government bond yields was the initial catalyst behind USD strength on Tuesday, with the 10-year yield hitting fresh cycle highs above 1.77% earlier on in the session before pulling back towards 1.70% and real yields also rising. However, with bond yields having pulled back in recent trade, USD has had to look elsewhere for impetus and has received plenty in the form of very strong US data.

The first key US data to be released on the session was Case-Shiller house price data for the month of February, which was very strong; US house prices are up 12.0% on the year, boosted amid the low-interest rate environment. High levels of house price inflation is not a concern for Fed policymakers who are intent in their insistence that the US needs more inflation, not less. Nonetheless, strong house prices are a positive for the economy through the wealth effect (when people are sat on assets that have gained in value it boosts their consumption).

Meanwhile, and perhaps more importantly, Conference Board Consumer Confidence survey for the month of March was also released on Tuesday; the headline index jumped to 109.7 in March, meaning that consumer confidence has now recovered about half of the losses incurred as a result of the pandemic (prior to the pandemic, headline consumer confidence was consistently in the 120s-130s, but in the months after the pandemic it ranged between the 80s-100s). That was the largest jump in Consumer Confidence since the aftermath of the 08/09 financial crisis and reinforces the narrative that the US economy is on the path to recovery as the vaccine rollout continues and the economy returns to normal – this narrative is likely to continue to support USD. The recent rise in Covid-19 cases ought to serve as a red flag that the US is not out of the woods just yet, however.

UK Update

Note that while USD has taken a chunk out of sterling on Tuesday, the currency is holding up better than most of the rest of the G10 currencies; while GBP is down about 0.3% on the day versus the buck, the euro and loonie are down 0.4% and the yen and Aussie are down closer to 0.5%. GBP continues to derive some underlying support from the UK’s relatively strong near-term economic outlook.

The UK’s vaccine rollout has been amongst the best out of the developed nations and fears of vaccine shortages are taking a backseat as the UK gears up to take delivery of Moderna and Novavax vaccines in April for the first time. Meanwhile, the Covid-19 infection, hospitalisation and death rate continues to trend lower, a sign that the strict lockdown and fast vaccine rollout has been effective – this is in stark contrast to the EU and now US, where cases are on the rise.

Thus, the government remains confident that the UK will be able to proceed with its roadmap for reopening on schedule and on Monday progress to what is effectively stage 1.5 (the stay-at-home order has been dropped and restrictions on meeting other households outside and on outdoor activities have been lessened. The big boost to the economy will come on 12 April, however, when non-essential retail is given the green light to reopen.