GBP/USD advances towards 1.4000 level as dollar dumped

• GBP/USD rose from the low 1.3900s to close to the 1.4000 level on Thursday amid USD weakness.
• The dollar was driven lower by a strongly risk on market vibe.

GBP/USD are likely to return their focus to UK fundamental with the release of key data on Friday.

GBP/USD steadily ground higher on Thursday starting the session in the low 1.3900s and under the pair’s 21-day moving average (which is close to 1.3940) and closing Thursday’s FX trade just under the 1.4000 level. On the day, that meant that the pair rallied 0.5% or about 70 pips. Thursday’s solid session means GBP has climbed into third spot in this week’s G10 performance table, up 1.1% on the week versus the US dollar and only lagging the Aussie (up 1.5%) and NOK (up 1.6%).

Driving the day

USD weakness was the main force driving GBP/USD higher on Thursday; the safe-haven US dollar suffered as a result of a strongly risk-on bias to trade, with risk assets (including risk-sensitive GBP) outperforming as 1) US President Joe Biden signed his $1.9T rescue package into law, 2) amid increased chatter about the Biden administrations follow up, more infrastructure-focused and potentially even larger stimulus package, 3) in wake of strong weekly US jobless claims numbers and 4) amid further positive vaccine efficacy data releases from Pfizer/BioNTech and Novavax.

With focus predominantly on the USD side of the equation, UK news has largely been ignored, but there was one story of note; according to a report by the FT, UK Ministers reportedly intend to overhaul capital markets rules in an effort to address fears London is losing competitiveness as a key global financial hub. Ministers are reportedly looking to make it easier for banks to hold capital, may scrap Mifid II regulations, and are reportedly planning a wide-ranging review of the country’s financial markets with the potential view to discard other EU standards. The theme of regulatory divergence with the EU will be a slow burner; while regulatory divergence could benefit the UK economy and make it more competitive, it could backfire on the UK if the EU is irked and starts applying tariffs.

Looking ahead, a large batch of hard data on the UK economy in the month of January set for release at 07:00GMT on Friday could bring the attention of GBP/USD traders back to sterling. The data includes January MoM GDP growth, which is expected to show that economic activity plunged nearly 5% on the month amid the country entering a third strict Covid-19 lockdown.

Meanwhile, USD traders will be on the lookout for the release of the February US Producer Price Inflation report at 13:30GMT, followed by the release of the preliminary Michigan Consumer Sentiment survey for March. The main focus of the day will likely not be on data, however, with US President Joe Biden expected to speak on his plans for the next stimulus package at some point during the day.