GBP/USD struggles to defend 1.3700 ahead of key Brexit talks

Having jumped the most in three weeks, GBP/USD steadies around 1.3710 during early Thursday.

The cable pair cheered broad US dollar weakness post-inflation release to print the notable run-up. However, cautious sentiment ahead of the key Brexit talks and recently hawkish Fedspeak challenge the bulls of late.

US CPI jumped to the highest levels since 1982 while matching 7.0% YoY forecasts, up from 6.8% previous readouts. The monthly figures rose to 0.5% versus 0.4% expected but softened below 0.8% prior.

Following that US inflation data, Federal Reserve Bank of St. Louis President James Bullard said, per Wall Street Journal (WSJ), “Four rate hikes in 2022 now appear to be on the table and, in the face of high inflation, a rate hike in March seems likely.”

On the same line were comments from the member of the Fed Board of Governors and incoming Vice Chairman of the FOMC Lael Brainard who said, “Inflation control is Fed's most important task. Additionally, President and CEO of the Federal Reserve Bank of San Francisco Mary Daly signaled a rate hike as early as March.

It is worth noting that the worsening virus conditions also challenge GBP/USD bulls. “Covid-19 infections in the UK climbed to a new record high in the first week of the year, though levels dropped slightly in London, new figures show,” per The Independent. The news also mentioned, “An estimated 4.3 million people in private households across the UK had Covid-19 in the seven days to January 6, up from 3.7 million in the previous week.”

Elsewhere, politics also plays its role to challenge GBP/USD buyers as UK PM Boris Johnson accepts mistakes of holding a booze party during the early pandemic days. However, the Tory leader refrains to step aside even as some of the key politicians demand.

Against this backdrop, US 10-year Treasury yields add 2.5 basis points (bps) to regain 1.755 level whereas the 2-year counterpart rises 1.6 bps to 0.923% by the press time. Further, S&P 500 Futures drop 0.20% intraday after the Wall Street benchmarks closed with mild gains.

Looking forward, UK’s Brexit Minister Liz truss will host European Commission Vice President Maros Sefcovic at the foreign secretary’s country residence, Chevening House, on Thursday, per Bloomberg. “UK Foreign Secretary Liz Truss enters the latest round of post-Brexit negotiations over Northern Ireland, facing a choice between picking a fight with the European Union that would curry favor with her Conservative Party faithful or cutting a deal to avert a trade war,” adds the news.

Bloomberg also quotes the British Trade Secretary Anne-Marie Trevelyan’s India visit for talks on an agreement that Britain hopes will help double its trade with India by 2030.

While UK-India news may have little impact on the GBP/USD prices, fears of a negative start to Truss’ Brexit career can drag the quote downwards.

Other than the Brexit talks, the US Producer Price Index (PPI) for December and weekly jobless claims, as well as Fedspeak, will be important to track as well.

Technical analysis

Sustained run-up beyond the previous resistance lines from July and June, respectively around 1.3680 and 1.3600, keeps GBP/USD buyers hopeful. However, overbought RSI conditions may test the immediate run-up until crossing the October tops near 1.3835.