GBP/USD eyeing a test of last week’s lows just above 1.3700

• GBP/USD has dropped to the 1.3720s and is eyeing a test of last week’s lows just above 1.3700.
• A broader pick-up in the US dollar in recent trade is weighing on the pair.

GBP/USD has fallen back to fresh lows of the day in recent trade in the 1.3720s, weighed amid a broad pick up in the fortunes of the US dollar versus all of its G10 counterparts. The pair now trades lower by around 0.7% or about 90 pips. As cable has slipped to fresh lows of the day and looks to test last week’s lows around the 1.3700 level, the Dollar Index (DXY) has advanced back towards the 92.50 mark and is now back above its 200DMA.

For comparison, after a strong start to 2021, GBP/USD is still a long way from its own 200DMA, which currently sits just above 1.3300. A more than 3.0% drop would be required for GBP/USD to fall all the way back to here. Looking at sterling price action over a much shorter time horizon tells a less pretty story; the currency is the worst performer in the G10 on the week by some margin, down more than 0.6% versus the US dollar (compared to the euro, which is up nearly 0.9% versus the buck and the yen, which is up closer to 0.8%).

Driving the day

Recent comments regarding his infrastructure spending proposal from US President Joe Biden and the release of the minutes from the 16-17 March FOMC minutes contained no new surprises and thus do not seem to have had a lasting impact on market sentiment. But as noted, in recent trade the US dollar has been picking up, though the move higher is for the moment quite modest and the DXY has some way to go to climb back to recent highs close to the 93.50 mark.

In terms of why GBP is underperforming, no fundamental catalysts appear to be driving the weakness. Indeed, the news out of the UK this week has for the most part been good, with UK PM Boris Johnson announcing as expected on Monday that the UK will be able to go ahead with its planned easing of lockdown restrictions on 12 April (most businesses will be allowed to reopen their doors to the public, provided this is done in a Covid-19 safe manner, aside from indoor hospitality). The narrative of the UK’s comparatively strong near-term economic outlook versus most of its developed market peers given its rapid vaccine rollout and decline in Covid-19 infections has meant that sterling has been the best performing G10 currency so far this year (and still is).

However, it appears that some profits are being taken on stretched GBP long positioning and this has particularly been the case in EUR/GBP, which is currently set for its sharpest one week rise since September 2020 – strength in this pair was the initial catalyst driving GBP/USD weakness before the USD started picking up more broadly.