GBP/USD climbing back towards 1.4000 as US/UK diffuse trade tensions

While markets for the most part remain in wait-and-see mode ahead of remarks from the Chairman of the Federal Reserve Jerome Powell at 17:05GMT, GBP/USD is an exception, with the pair pushing on towards the 1.4000 level and eyeing a test of Wednesday’s highs at 1.4006. On the day, the pair trades with gains of about 0.3% or about 45 pips.

On the day, GBP is one of the G10 outperformers, meaning that, on the week, it has now managed to climb to fourth spot in the G10 rankings, up a modest 0.5% versus the dollar (compared to the euro, which is down 0.3% and the yen which is down closer to 1%).

Driving the day

Thursday has seen positive news on the UK/US trade front; after the UK suspended tariffs on some US goods back on 1 January 2021 (tariffs it had been forced to implement as an EU member that had been involved in the US/EU Airbus/Boeing subsidy dispute), the US has reciprocated and removed tariffs on some UK goods, including single malt whiskies, cheese, cashmere and machinery. UK Trade Secretary Lizz Truss said the move by the US “paves the way for an improved trading relationship with the US across the board”.

The above news seems to be giving GBP a helping hand on Thursday, while market commentators also argue that GBP continues to derive support from Wednesday’s budget announcement (which overdelivered on expectations, judging by the bond market reaction, at least), as well as the country’s ongoing vaccine rollout success which seems to be aiding a much faster than expected drop off in the seven-day moving average of the daily Covid-19 death toll (now under 200 per day, versus previous SAGE forecasts it would take until the end of the month to drop to this).

Looking Ahead

The main event of the day will be remarks from the Chairman of the Federal Reserve Jerome Powell, who will be speaking at the WSJ Jobs Summit with his remarks scheduled for release at 17:05GMT. Last week, Fed officials largely avoided expressing concern about the rise in bond yields seen in February and bond yields have since stabilised at the start of March. However, Fed officials this week have shifted to talking about what the Fed could do if the rise in bond yields got “out of control”, with members noting that the Fed could extend the weighted average maturity of its bond market purchases (in order to buy more longer-term debt and thus push longer-term yields lower) or even opt for yield curve control (where they would set a target yield for a government bond and buy whatever quantity is needed to keep yields there).

Most market commentators do not expect Powell to make any definitive comments on what the Fed would do in the event of further bond market dysfunction, given that this is a decision that would need to be made by the FOMC as a whole, not just by the Chairman, meaning more guidance on this front might have to wait until the next FOMC meeting in two weeks. Thus, Powell might just reiterate his usual dovish script; policy to remain highly accommodative, with rates to be held at zero until dual mandate met, which could take up to three years and QE not to be tapered until “substantial” progress has been made towards mandate.