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  • GBP/USD has rallying back above 1.3800 and is looking to test its 21 and 50DMAs in the 1.3840s.
  • The final version of the March Markit Manufacturing PMI survey released on Thursday was notably stronger than the flash estimate.
  • The main driver of the upside is USD weakness amid falling US government bond yields.

GBP/USD has been on the front foot in recent trade, rallying back to the north of the 1.3800 level and beyond Wednesday’s 1.3812 highs. To the upside, there is a key area of resistance in the 1.3840s where the 21 and 50-day moving averages both reside, as well as the 29 March high. This resistance might well be a struggle to get above, but if the bulls do succeed, that would open the door (technically speaking) for a more drawn-out move up towards March highs in around 1.4000. On the day, the pair is trading with decent gains of about 0.3% or over 40 pips. That means sterling is one of the best-performing currencies in the G10, second to NZD.

Driving the day

The final version of the March Markit Manufacturing PMI survey released out of the UK this morning saw a notable upwards revision to 58.9 from the preliminary reading, released last week, of 57.9. That means optimism among manufacturing sector purchasing managers is at its highest since February 2011, i.e. more than 10 years ago. Strong data thus seems to be offering GBP some modest tailwinds. Otherwise, there is not a great deal to update on of any relevance to pound sterling; most expect the currency to continue to benefit from the UK’s advancing vaccine rollout, low Covid-19 infection rate (relative to peers anyway) and continued march towards reopening according to the government’s “roadmap out of lockdown” – these three factors combine to give the UK a strong near-term economic outlook, especially in comparison to the country’s mainland European peers whose vaccine rollout has gone more slowly and are back under lockdown in order to contain a third virus wave.

The major driver of GBP/USD strength on Thursday appears to be more coming from the dollar side of the equation; US government bond yields have been dropping in recent trade, with the 10-year yields now in the 1.68s% in a sharp reversal from yesterday’s 1.75% highs. This is weighing on the US/UK rate differential, which is bullish for GBP/USD. Falling long-term US government borrowing costs are also contributing to a surge higher in duration sensitive US tech and growth stocks (the Nasdaq 100 is currently 1.7% higher on the session) whilst crude oil markets are experiencing some strength amid anticipation that OPEC+ will agree to roll over output cuts – the combination of strength in these two risk assets (i.e. stocks and oil) that are typically negatively correlated to the safe-haven US dollar is likely also to be weighing. A lack of safe-haven demand makes sense when looking at the G10 performance table on the day, with fellow safe-haven currencies JPY and CHF amongst the underperforms alongside USD.

FX markets saw very minimal reaction to the latest ISM Manufacturing PMI survey for the month of March – the report was strong, but was marred by increasing evidence of the negative impact of supply chain disruptions, shortages and delays (that’s partly why the prices paid subindex has gone and remains so high). For reference; the headline index came in at 64.7 versus consensus forecasts for a rise to 61.3 in March from 60.8 in February. In terms of the subindices, New Orders rose to 68.0 from 64.8 in February, Employment rose to 59.6 from 54.4 (above the expected 53.0) and Prices dropped ever so slightly to 85.6 from 86.0 (a little above the expected 85.0). The strong employment subindex is a positive sign for NFP on Friday.