GBP/USD falls victim to strong US dollar pick up, slides beneath 1.3600

• GBP/USD has dropped back beneath the 1.3600 level in recent trade as a result of broad US dollar strength.
• Though USD has seen significant recovery in recent trade, GBP/USD is still higher on the week.

GBP/USD has dropped back beneath the 1.3600 level in recent trade, not as a function of any UK related domestic news but rather as a result of a broad pick up in the US dollar that has seen the Dollar Index advance back to fresh highs on the week beyond in the 90.70s. At present, the pair trades with losses of around 100 pips on the day or about 0.7%.

USD rallies

No specific news or headline is behind recent USD strength, though analysts and market commentators are pointing to a few developments that are likely acting as a headwind to sentiment and thus helping the safe-haven US dollar.

Some market commentators think markets are seeing a “sell the fact” reaction in wake of incoming US President Joe Biden’s stimulus plan. Others are pointing to pandemic news that has admittedly been a little worrying on Friday, with more and more European nations heading for tighter lockdowns (Italy and Germany are toughening restrictions) and Pfizer is delaying its shipments of vaccines to the continent temporarily as it upgrades production capacity in its European factory.

Meanwhile, recently released US Retail Sales numbers for December were ugly (and come on the back of an equally ugly December jobs report and poor weekly jobless claims data for the first full week of January) and the outgoing Trump administration continues to do the best it can to sour US/China relations before the arrival of the Biden administration (the Pentagon blacklisted nine additional).

With Fed Chair Jerome Powell reasserting the Fed’s dovish credentials (and seemingly provoking a positive reaction in the bond markets in his wake, with real yields falling and inflation expectations rising), market participants might not be rushing to get long USD just yet. But given all of the above, an increasing number of them, in a market that has been very heavily short USD over the last few months, might be closing out long-term shorts.

UK fundamentals

Though USD has seen significant recovery in recent trade, GBP/USD is still higher on the week and GBP still retains its spot as this week’s best G10 FX performer. GBP has been emboldened by the UK’s progress with its mass vaccination programme, which is well ahead of most of its developed market peers. Reports last night suggest that the country is going to attempt to ramp up daily vaccinations to 500K per day, with vaccines potentially set to be administered 24/7. This means all over 50s might be able to be vaccinated by the end of March.

Meanwhile, the currency has also received tailwinds from a repricing of money market expectations for BoE negative interest rate policy (NIRP) in 2021 and beyond; after comments from BoE Governor Andrew Bailey earlier in the week, who did not sound overly enamored with NIRP at all, markets downgraded their bets for further rate cuts in the coming months, supporting sterling.