GBP/USD sharply off highs and back below 1.3300 as US dollar surges post-PMIs

• GBP/USD has seen a sharp reversal back below 1.3300 in recent trade amid a resurgent USD dollar on strong PMI data.
• But GBP/USD is still the best performing USD major pair on the day, buoyed by Brexit hopes as well as an incoming end to the national lockdown.
• The pair managed a bullish breakout of a long-term upwards trend channel earlier in the session, though these gains have now been eroded.

GBP/USD is sharply off highs of just shy of the 1.3400 mark in recent trade, amid a resurgent US dollar and trades back below 1.3300. Though the pair still the best performing USD major pairing on the day, it now trades with losses of just over 10 pips or 0.1%.

Resurgent buck

The US dollar has seen extensive upside in recent trade, triggered by much stronger than anticipated preliminary US Markit PMI data for November. Manufacturing PMI unexpectedly jumped to 56.7 from 53.4, versus expectations for a slightly drop to 53.0. Meanwhile, services PMI also unexpectedly jumped to 57.7 from 56.9, versus expectations for a drop to 55.0. That put manufacturing PMI at its highest level since September 2014 and services PMI at its highest level since April 2015. “The November PMI surveys provide the first post-election snapshot of the US economy, and makes for very encouraging reading”, said Chris Williamson, Chief Business Economist at IHS Markit.

Note that it is unusual for IHS Markit PMI’s to trigger such a large reaction, but this report might have triggered such a reaction as it contained evidence of a coming uptick in inflation; “the surge in demand and hiring has pushed prices and wages higher. Average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported” commented IHS Markit’s Williamson.

Hints of coming inflation could be giving the USD bulls might hope that Monday’s data foreshadows a coming rise in inflation that might lead to the Fed raising interest rates sooner than currently expected by most market participants, hence the large positive USD reaction.

Elsewhere, other factors that might be working in USD’s favour are recent reports that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion. USD typically does well from signs of increased global trade tension.

But GBP still the G10 outperformer

Only GBP and CAD continue to trade in the green vs USD amid its recent resurgence. A few domestic factors are helping prop up GBP;

1) Brexit Hopes – Sky News reported over the weekend that 95% of the Brexit deal is complete (similar to reports we got last week). Moreover, the Telegraph reported that UK PM Johnson is set to reach out to EU Commission President von der Leyen some time this week in a “final push” for a deal. Though the outstanding issues of fisheries, state aid and governance remain unresolved, it sounds as though a deal is there for the taking and, at this point, failure to get a deal would constitute a catastrophic failure on both sides of the English Channel – that is the markets seem to be taking the weekend news this morning. Any call that does go down between Johnson and von der Leyen this week could be crucial in determining whether the two sides are able to clinch a deal this week. Brexit will continue to be the most important factor to consider for GBP traders this week.

2) Lockdown Ending – UK PM Johnson just addressed parliament and outlined that the UK will return to the tiered system when the national lockdown ends on 2 December. With nations in Europe seemingly more reluctant (i.e. France) to ease lockdowns that the UK, the UK’s economy might outperform some of its neighbours in the final month of the year, which could be helping GBP also today.

3) Government Spending – On Wednesday, UK Chancellor of the Exchequer Rishi Sunak will announce a new one-year spending review, which most think is likely to involve one final borrowing splurge as the economy continues to grapple with the fallout from the virus. Over the weekend, Sunak spoke about how there would be no austerity yet (austerity typically being a short-term negative for the economy), so this could also have supported GBP a little on Monday.

4) Early vaccine access – Finally, it looks as though the UK is going to have better access to its homegrown AstraZeneca vaccine than some of its neighbouring countries, meaning the country might be able to achieve herd immunity a little faster and therefore perform better in 2021. Moreover, UK authorities might approve Pfizer’s vaccine as early as this week, meaning mass vaccinations can start as early as December. That would make it one of the first Western developed countries to start mass vaccinations.

GBP/USD slumps back beneath support at 1.3313

Having surged nearly as high as the 1.3400 mark on Monday and broken above a long-term uptrend resistance (linking the 16 September, 21 October and 18 November highs), the entire move has now reversed. That means GBP/USD is now back within its former long-term upwards trend channel, bound by the aforementioned uptrend resistance, and bound to the downside by an uptrend linking the 23 and 24 September and late-October/early-November lows.

The pair has also reversed back below a significant area of support in the 1.3313-1.3320 region (the 4 September, 11 November and 18 November highs).

In terms of what is next for the cross then, obviously much depends on 1) whether this recent bout of USD strength can last and 2) whether the EU and UK can clinch a Brexit deal in the very near future. If the answer to the first question is yes and the second no, GBP/USD could be looking at a retest of 12 November lows and its 21-day moving average at just above 1.3100, and even the lower bounds of the pair’s long-term upwards trend channel, which would likely come into play around 1.3040.

If the answer to the first question is no and the second yes, then this might turn out to be more of a temporary set-back for GBP/USD, which might soon be testing Monday’s highs just shy of 1.3400 and perhaps even eyeing a test of year-to-date highs at 1.3483.