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  • GBP/USD saw reasonable gains on Wednesday and tested its 21DMA in the 1.3930s.
  • Amid a lack of UK news, the pair traded as a function of the US dollar, which was weaker.

GBP/USD is struggling for further ground as it reaches the mid-1.3900s and hits resistance in the form of the 21-day moving average (DMA) in the 1.3930s; the 21DMA has been capping the price action since last Friday and a break above this level could open the door to a move back towards the March highs above the 1.4000 level, though such a move would require a compliant (i.e. weakening US dollar).

In terms of the price action on Wednesday; it was a pretty decent session for the pair, broadly speaking, which rebounded strongly from lows beneath the 1.3850 level to comfortably reclaim the 1.3900 handle and hit highs of just shy of the 1.3940 mark. That translated to on-the-day gains of about 0.3% or 36 pips.

Driving the day

UK fundamental news flow was light om Wednesday. The only news story of real note has been the fact that the EU is gearing up to take the UK to court over its recent unilateral actions to extend customs waivers between the mainland and Northern Ireland – markets seem for now to be looking at this story as political theatre rather than anything that will meaningfully damage future UK/EU trading relations.

Things are set to pick up for sterling before the end of the week, however; Friday sees the release of a large batch of hard data, including monthly GDP, industrial production and trade data pertaining to the month of January. The former is likely to be soft, with the country having just entered a new national lockdown in a bid to contain a second, even larger spike in Covid-19 cases. Despite the fact that the spike in Covid-19 cases was much larger than back in March/April 2020, the fall in GDP is expected to be much more modest, with the economy having become more resilient/used to functioning under lockdown conditions.

In the meantime, there is not too much for sterling traders to go off of and so GBP/USD is likely to trade as a function of US dollar sentiment. Wednesday was not a good day for the buck, which was hurt by a combination of strength in risk assets (minus Big Tech), precious metals and US bond prices (meaning falling US yields), all of which was accelerated/exacerbated by a softer than anticipated US CPI report; headline inflation jumped from 1.4% to 1.7% in February, as expected, but Core CPI was a little softer than expected, and seems to have eased some of the “overheating” fears that had been driving US bond yields higher and weighing on equities in recent weeks (to the benefit of the US dollar).

Elsewhere, Congress has now officially passed US President Joe Biden’s stimulus package and the President will sign it into law on Friday. Meanwhile, US/China headlines have been mixed, with key US officials remaining publicly critical of China over its actions in Hong Kong, Xinjian and towards Taiwan, but with US and Chinese officials now preparing for a get-together in Alaska next week, where they will “compare notes” and discuss all manner of topics. The theme of US/China relation has played second fiddle in the eyes of the market since the onset of the Covid-19 pandemic in Q1 2020, but is likely to return as a key driver of market risk appetite in the coming years as the pandemic fades away – note that in the past, signs of worsening relations have been USD positive, so any indication that next week’s meeting has gone badly might cause pairs like GBP/USD to fall.