GBP/USD rallies back above 1.3700 as USD wanes, with GBP leads the G10 gains

• GBP/USD has rallied in recent trade to back above the 1.3700 level from earlier lows underneath 1.3650.
• An improvement in risk appetite helped the pair by driving USD lower.

GBP/USD has rallied in recent trade to back above the 1.3700 level from earlier lows underneath 1.3650. The pair now trades with gains of about 0.3% or around 45 pips on the day and GBP is amongst the top three best performing G10 currencies on the day.

Driving the day

Risk appetite took a turn for the better in wake of better-than-expected weekly initial jobless claims data (which showed claims dropping to 847K from 914K, below expectations for a reading of 875K) and inline with expectations preliminary Q4 GDP reading (GDP grew at an annualised rate of 4.0% in the final quarter of 2020). In truth, though the timing of the improvement in risk appetite, which saw USD drop (and GBP/USD rise) and stocks rally, coincided with the US data releases, it does not seem to have been caused by them. Indeed, the GDP number was merely a confirmation of expectations that the growth rate of the US economy decelerated sharply into the end of 2020 and the initial jobless claims number, though better than expected, is still very high by historical standards.

Rather, the move appears to coincide with a rally in precious metals markets, which seemed to have been triggered by speculation that retail traders who had been focusing on pumping stocks like GameStop were now turning their focus to silver (and silver miners). Indeed, retail brokers have tightened trading restrictions on favourite retail “short-squeeze” stocks such as GameStop and their stock prices are falling. This might be helping broader equity market sentiment, given that traders yesterday were talking about how hedge funds that were being hurt by the short-squeeze were being forced to sell profitable long positions in larger-cap stocks.

UK fundamentals

In terms of domestic UK fundamentals, there hasn’t been too much of note today. Yet GBP is one of the best-performing currencies in the G10 (lagging only SEK and NOK). Market commentators are likely to suggest that the ongoing support for sterling versus its peers is as a result of the “vaccine trade”; i.e. the notion that, given its more efficient mass vaccination efforts, the UK is likely to attain herd immunity well before the likes of the EU and even US, meaning it can reopen its economy faster and thus enjoy a faster economic recovery.

Note that vaccine protectionism from the EU represents a threat to this narrative; angered at production delays in AstraZeneca’s EU vaccine making facilities and angered at the company’s refusal to divert vaccines made in the UK to the EU, the bloc is threatening to clamp down on vaccine exports. This could affect Pfizer vaccine exports from Belgium to the UK as early as this weekend. Should EU exports to the UK be blocked, forcing the UK to rely on home-produced vaccines, the achievement of herd immunity through the vaccination of 75% of the population could be pushed back by nearly two months, according to data analytics firm Airfinity (cited by the Guardian).

The criteria for blocking exports will be published on Friday and the mechanism to actually do it is expected to come a few days later. This will be a development worth watching for GBP that could present some downside risks.