- GBP/USD has recovered from weekly lows in the 1.3670s and trade above 1.3700 again.
- Wednesday’s UK CPI report was soft but the PMI report was solid.
- GBP/USD appears to be taking its cue more from dollar flows.
Having sold off relentlessly since the start of the week, during which time GBP/USD has dropped from around the 1.3850 mark to Wednesday’s lows in the 1.3670s, the pair has regained some composure in recent trade, recovering back to the north of the 1.3700 level. It is still down around 0.2% or 25 pips on the day, however.
Driving the day
Wednesday morning’s much softer than expected February Consumer Price Inflation report does not seem to have dented sterling sentiment too badly. Admittedly, GBP/USD did see some selling pressure in the aftermath, but this appears to have been more as a result of a broader pick up in the US dollar at the time and all of those losses have now been recouped. As a recap; headline CPI came in at 0.4% YoY (below expectations for 0.8% YoY) and at 0.1% MoM (below forecasts for 0.5% MoM). The Core CPI and RPI metrics were all also soft, but PPI output rose more than expected, jumping 0.6% on the month, versus forecasts for an increase of 0.3%. According to Capital Economics, the disappointing CPI report “displays the disinflationary effect from COVID-19 lockdowns, will delay the rebound to 2.0% and perhaps prompt the markets to reconsider their view that interest rates will rise next year”, though there has been no indication of any movements in money market pricing this morning.
Also released in the early part of Wednesday’s European session was the latest UK Markit PMI report (the preliminary version of the March survey); it was a massive beat on expectations, with the composite index shooting higher to 56.6 from 49.6 in February, well above expectations for a rise to 51.1, amid strong manufacturing and services performance on the month. According to IHS Markit’s chief economist Chris Williamson, “the UK economy rebounded from two months of decline in March, with business activity growing at its fastest rate since last August as children returned to schools, businesses prepared for the reopening of the economy and the vaccine roll-out boosted confidence”.
As with the CPI report, the PMI report was broadly shrugged off by sterling. GBP/USD appears much more interested in US dollar-related flows, which continue to point in the buck’s favour. While data this week out of the US has been a mixed bag (survey data has been very good, housing data has been bad and Durable Goods Orders was the latest in a strong of hard data releases for the month of February to disappoint), chatter is growing regarding the next infrastructure-focused stimulus package, which feeds into the US economic outperformance and Fed tightening earlier than other central banks narratives, both of which are bullish for the buck.
Meanwhile, though the US and UK vaccine drives have both been going very well, it appears the UK’s drive it at threat of being slowed by vaccine nationalism abroad; EU officials said the bloc is tightening vaccine export rules in an attempt to close loopholes, with the mechanism will be based on proportionality and reciprocity considerations. That essentially means the EU wants to target exports to countries that have not been sending any vaccines back to the EU, such as the UK. India is also taking steps down the road of vaccine nationalism and has reportedly delayed big exports of the AstraZeneca vaccines according to sources, who add that there will be no exports until the situation stabilise and there have been no vaccine exports from India since Thursday. India has been another place where the UK has imported a lot of vaccines from. Supply to the UK is set to be lumpy in the coming months and the US might soon overtake the UK in terms of the speed of its vaccination drive.
Looking ahead, GBP/USD traders ought to keep an eye on Fed speak in the coming hours, ahead of remarks from Bank of England Governor Andrew Bailey on Thursday.
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