GBP/USD slips back to mid-1.3700s as sterling struggles

GBP/USD has been on the back foot for most of Wednesday’s session, with the pair dropping from Asia Pacific levels above the 1.3800 level to trade either side of the 1.3750 mark in more recent trade. On the day, that means the pair has dropped about 60 pips or just under 0.5% and is now down about 0.4% on the week, putting sterling at the bottom of this week’s G10 FX performance table.

Driving the day

There does not appear to be any fundamental catalyst explaining recent selling in sterling or why GBP is now the underperforming G10 currency on the week. Indeed, the near-term economic outlook in the UK looks to be amongst the strongest in the G10, with the country’s vaccine rollout racing ahead, infection rates dropping and the country moving along its reopening plan as expected – on this latter point, UK PM Boris Johnson announced that the UK will move to stage two of lockdown easing on 12 April on Monday, which will involve most businesses being able to reopen their doors to the public, aside from indoors hospitality. This is expected to provide a material boost to the economy.

GBP/USD appears to be feeling the drag from weakness in sterling versus sits Eurozone counterpart that has sent EUR/GBP sharply higher in recent days and back to fresh monthly highs in the mid-0.8600s. Market commentators are chalking this week’s sharp rally in EUR/GBP to a technical correction/profit-taking/position adjustment in wake of a prolonged sell-off in the pair since last December.

Indeed, between the start of the year and this Monday (when the pair hit multi-month lows under 0.8450), EUR/GBP had dropped around 5.5%. Following the recent retracement higher, the drop since the start of the year is still around 3.5%. Some market strategists have been arguing that relatively higher levels of positivity regarding the UK’s near-term economic outlook versus that of the EU’s is now “in the price” and has been for some time, something which recent price action suggests likely is the case.

Back to GBP/USD – USD weakness this week has saved the pair from an even sharper decline. Should GBP weakness persist as traders continue to pare back on long positions and should the fortunes of the US dollar soon improve (as some think is likely given the recent run of strong US economic data and the optimistic US growth outlook), GBP/USD could be looking at a more sustained drop below recent lows in the upper-1.3600s.