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  • GBP/USD trades just under 1.3800 as the pair gains for a second day, though is still lower on the week.
  • Softer USD conditions are the main driver of the gains on Friday, with UK and US data having been ignored.

GBP/USD is trading with decent gains for a second straight day, with the pair currently trading at session highs just under the 1.3800 level, a near 130 pip rebound from Thursday’s session lows in around 1.3670. While GBP/USD’s on the day gains of nearly 70 pips (about 0.5%) on the day are impressive, the pair still has a long way to go to get back to the levels around which it started the week around the 1.3850 mark – on the week, the pair continues to trade with losses of about half a percent or 70 pips.

Driving the day

While GBP outperformance on Thursday was behind GBP/USD’s recovery back above the 1.3700 level, outperformance which market commentators attributed signs that UK/EU vaccine tensions are easing, the pair’s recovery on Friday seems to have more to do with the USD side of the equations. Despite a rise in US government bond yields (10-year yields are up nearly 5bps to back above 1.65%), which in recent weeks has been USD supportive, the dollar is seeing more consolidative trade on Friday, with the DXY slipping back from weekly highs around 92.90 amid a broad improvement in the market’s broad appetite for risk (Global equities and risk-sensitive commodities and currencies are mostly higher). As to why markets are in a better mood on the final day of the week, there does not seem to be anyone definitive fundamental catalyst and market participants are chalking the price action up to pre-weekend and quarter-end position adjustment.

Data Recap

In terms of FX relevant economic events, there have been a few to note on both sides of the Atlantic. Firstly, UK Retail Sales data for the month of February was released prior to the start of the European session; sales grew at 2.1% MoM, roughly in line with market expectations and only paring back very slightly on January’s sharp 8.2% MoM drop. As expected, UK retail sales continue to struggle in February with non-essential retail closed in the country as a result of the third national lockdown. With shops reopening in mid-April, retail sales are expected to bounce. But that means at least one more month of retail sales data being in the doldrums; note that CBI Distributive Trade survey data for March suggests a substantial pick up in spending is unlikely. This is expected by sterling traders, however, and ought not hurt the currency.

Meanwhile, there are also important US data releases worth noting. Firstly, Personal Income dropped 7.1% in the month of February, roughly in line with expectations as the boost from the $600 stimulus cheques petered out. Personal Spending also saw a 1.0% MoM drop, a little larger than the expected 0.7% MoM drop. Capital Economics note that poor weather also contributed to the declines. Looking forward to March, the economic consultancy expects both metrics to pick up substantially as a result of the recently dispersed $1400 stimulus cheque, as well as amid better weather. Capital Economics expects overall consumption growth of close to 10% in Q1 2021.

Meanwhile, the Fed’s favoured measure of inflation Core PCE dropped unexpectedly to 1.4% YoY in February from 1.5% in January, but most still expect the April and May numbers to show big YoY increases as a result of weak base effects (reflecting the negative impact on prices of the first lockdown). As was the case with UK Retail Sales data and sterling, US data has not had too much of an impact on USD nor GBP/USD on the final trading day of the week.