GBP/USD eases back above 1.3550 amid quiet MLK holiday markets

• GBP/USD has recovered from early European morning session lows and now trades comfortably back above the 1.3550 level.
• The pair has been primarily focused on the USD dynamics so far on Monday.
• GBP traders will watch December inflation, retail sales and January flash PMIs this week.

GBP/USD has seen a gradual recovery from early European morning session lows at 1.3520 and now trades comfortably back above the 1.3550 level, though is still down by around 0.1% or around 10 pips. Volumes have dropped off significantly in recent trade and will continue to do so into the evening given the absence of US market participants, who are away for Martin Luthar King Junior Day. Things will pick up after 23:00GMT as market participants begin to return at the start of the Asia Session.

The pair has been primarily focused on the USD dynamics so far on Monday, with GBP/USD undulating in line with movements in the Dollar Index (DXY); just as GBP/USD is off 1.3520 lows, the DXY is off highs in the mid-90.90s and now trades close to 90.80.

DXY has been a little stronger on Monday amid continued Covid-19 concerns; China reported over 100 cases for a sixth day in a row on Sunday, raising concerns of a new post-Lunar New Year Holiday wave of Covid-19 cases as cross-country travel picks up and overshadowing upbeat GDP numbers for Q4.

UK fundamentals

The UK is currently in the midst of the worst part of the pandemic thus far, with deaths frequently surpassing 1K per day last week. However, with new infections now having dropped substantially WoW (indicating that the lockdowns are to some extent working to bring transmission down), the rhetoric from officials has been a little more upbeat.

UK PM Boris Johnson spoke on Friday of early signs that the pressure may be slightly easing in London hospitals and said on Monday that the government will review lockdown measures on the 15th of February, although he does not think things will be substantially different before spring. The UK is hoping to have vaccinated all over 50s and other vulnerable groups by then, with the country’s vaccination progress still significantly outstripping that of most other major developed economies.

Meanwhile, in terms of fiscal news; the UK Chancellor of the Exchequer Rishi Sunak has reportedly drawn up plans to make one-off £500 payments to almost 6M people in the UK in an attempt to ward off a backbencher revolt over government plans to end the emergency increase to benefits implemented in the first stages of the Covid-19 crisis.

Looking ahead, while the pandemic, any further fiscal news and updates regarding UK/EU negotiations on their future services trade deal will be the primary factors to watch, GBP traders will also take notice of a speech from the Bank of England’s Chief Economist Andy Haldane on Tuesday, December inflation numbers on Wednesday and December retail sales and flash PMIs on Friday.

Yellen’s testimony

In terms of the USD side of the GBP/USD equations, ahead of Thursday’s inauguration of Joe Biden to the US Presidency, eyes will also be on incoming US Treasury Secretary Janet Yellen’s Capitol Hill testimony on Tuesday; the former Chairman of the US Federal Reserve is expected to make it clear that the USA will not seek to purposely weaken the US dollar. According to the Wall Street Journal, Yellen will say that “the value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy” if asked about the incoming administration's dollar policy.

Any departure from such a policy could trigger some volatility. However, calls for a weaker USD does not mean getting a weaker USD; outgoing US President Donald Trump spent much of the last four years calling for a weak USD to help US exporters but failed to get until right at the end of his term, and that was only to do with the Fed’s actions to combat the pandemic. His protectionist trade policies and fondness of fiscal stimulus were seen as a USD positive combination at the time.

Bank of Singapore analyst Moh Siong Sim notes that Yellen “is kind of signaling a hands-off approach, which is reverting to what had traditionally been the case before Trump… I think the dollar and financial markets will be less of a focus, in terms of verbal rhetoric, for the Treasury secretary and the key focus will be getting policy implemented in terms of fiscal relief”.