GBP/USD drops back below 1.3600 amid choppy US dollar conditions

• GBP/USD continues to struggle to reclaim the 1.3600 level and has reversed back under the big figure and towards 1.3550.
• The currency underperformed this week as England returned to a March 2020 style lockdown and on BoE NIRP bets. 

GBP/USD continues to struggle to reclaim the 1.3600 level and after topping out just under 1.3640 a few hours ago, has reversed back under the big figure and towards 1.3550. Below and around this level, the pair ought to find solid support, as has been the case for most of the week so far. At present, the pair trades about flat on the day just to the north of the 1.3550 mark.

The pair was broadly unresponsive to recently released US labour market numbers. The report was underwhelming (the US saw a surprise net job loss of 140K in December), but markets already see the data as out of date. Mass vaccinations, more fiscal stimulus from a Democrat-controlled Congress and a much better global growth outlook means markets expect the jobs numbers to improve substantially once 2021’s dark Covid-19 winter is over. Hence why US equity markets, crude oil markets and US bond yields continue to rally.

Sterling’s week

GBP/USD sits close to the bottom of the G10 performance table on the week. Recent underperformance in JPY on account of rising US/Japanese rate differentials has been the only thing to save the currency from bottom spot.

As a reminder, the currency underperformed early in the week as England returned to a March 2020 style lockdown in order to curb the still rapidly accelerating spread of the new, more transmissible strain of Covid-19 discovered in Q4 2020. Fears of the NHS being overwhelmed in the coming weeks are rife; the Chief Executive of NHS England said that the NHS will be overwhelmed in two weeks if the current pace does not drop “significantly”.

However, there is light in the end of the tunnel in that UK is making excellent progress (versus its international peers anyway) with its mass vaccination programme; the UK PM said that, as of Thursday, the country had vaccinated 1.5M people and averaged a vaccination rate of 50K per day. In order to hit the government’s target of vaccinating 13M people by mid-February, 300K people will need to be vaccinated, but with the army being brought in to help, the target seems feasible.

On Friday, the UK approved the Moderna Covid-19 vaccine, the third vaccine to be approved in the country. In further good news, Pfizer said that its vaccine appears to be effective against the UK and South African variants according to lab tests.

Separately, another factor weighing on GBP this week was the market upping their bets for the BoE to take interest rates into negative territory in 2020; given the double-dip recession the second wave of Covid-19 is almost guaranteed to have dragged the country back into, MUFG “now believe the BoE will cut rates into negative territory on 4 February… hence why GBP will continue to underperform in FX markets”.

GBP/USD forming a descending triangle

GBP/USD is forming a descending triangle that may be subject to a downside break (a break which may coincide with a move above 90.00 in the Dollar Index). The pair has been posting lower highs all week; of 1.3700 on Monday, of 1.3670 on Tuesday and of around 1.3640 on Friday. 1.3530-1.3550 has acted as a floor to the price action thus far, but the level could go, opening the door to a move lower towards 1.3500 and the 21-day moving average at 1.34857.

GBP/USD hourly chart