GBP/USD nurses losses, recovers back above 1.3900 level as volumes drop pre-weekend

• GBP/USD is back from low in the mid-1.3800s to trade above 1.3900 again.
• The pair has traded at the whim of the dollar, which was boosted by higher US bond yields.

Having dipped as low as the 1.3860s in earlier trade, GBP/USD has nursed a recovery and is now back above the 1.3900 level and looks to be consolidating around 1.3925 as the volumes die down into the weekend. But the pair is still down about 0.5% or nearly 70 pips on the day, with the US dollar dominant against the majority of its G10 counterparts, apart from the loonie.

Driving the day

The US dollar has been in the driving seat in FX markets on Friday and GBP/USD was no different. The pair dropped back from Asia Pacific session highs at the 1.4000 level as the US dollar picked up in tandem with a rally in US government bond yields (which started during the Asia Pacific session).

Market commentators attributed the rise in US government bond yields to 1) the fact that US President Joe Biden signed his $1.9T stimulus “rescue” package into law on Thursday, providing a strong boost to the near-term outlook for the US economy and 2) amid increased chatter regarding the next US fiscal stimulus package, which will focus much more heavily on rejuvenating US infrastructure and could have a price tag of well above the bill that was just passed.

Just as the $1.9T package boosts the near-term outlook, a multi-trillion infrastructure package, which is likely to invest over the course of the next four years, would provide a serious boost to the longer-term outlook for the US growth path – a key question amongst market participants right now is whether this will lead to the US economy overheating and the Fed tightening policy earlier than currently priced in by markets. The greater these fears, the higher yields and the US dollar will go and the more currency pairs like GBP/USD will suffer.

With regards to UK-related news, there has not been a great deal to note aside from the mixed January hard data release from the ONS during the European morning; GDP was stronger than expected in the first month of the year, but industrial output was weaker. One report worth noting that will certainly come as a disappointment to the Brexiteers is a Telegraph article claiming that a US/UK trade deal might not come about until 2024, as the Biden administration prioritises domestic issues and the foreign policy challenge presented by the rise of China.

In terms of the key themes/economic events to be on the lookout for next week; both the FOMC and BoE will be delivering rate decisions, and this will keep GBP/USD trader occupied throughout the mid-week. US February Retail Sales will also be out on Tuesday.