GBP/USD subdued in the mid-1.3600s as attention turns to Thursday’s BoE meeting

• GBP/USD fell to the mid-1.3600s on Wednesday amid a further pickup in the US dollar.
• Attention is turning to Thursday’s Bank of England meeting and anything they might say on NIRP.

GBP/USD fell on Wednesday, a function of a broad pick up in the US dollar that saw the Dollar Index (DXY) continue its gradual grind to the upside to hit fresh two-month highs above 91.30. Back to cable; amid the stronger US dollar, the pair gradually slipped back from Asia Pacific highs around the 1.3680 mark to hit lows in the 1.3620s prior to the start of US trading hours. Since then, trade has been choppier and more mixed, with the price action swinging either side of but for the most part sticking close to 1.3650 level. In the end, GBP/USD finished the day 0.17% or just over 20 pips lower.

Driving the day

There were no specific drivers of GBP weakness on Wednesday and the currency didn’t perform particularly badly compared to most of its G10 peers. Sterling seeming remains underpinned by the UK’s stellar (by international comparison) vaccination programme that saw the number of people to receive the first jab surpass the 10M mark on Wednesday. Meanwhile, new infections continue to gradually fall suggesting that the peak of the second wave is well in the back rearview mirror. Deaths remain stubbornly high but are expected to start dropping back into the low 100s per day from above 1K per day in the next few weeks.

UK PM Boris Johnson talked vaguely about easing restrictions nationally; it seems likely that when vaccinations hit a certain threshold, at the very least, schools will be reopened and if infections continue to drop at the current pace and the daily death toll follows, restrictions on non-essential businesses will likely be eased.

Meanwhile, tensions between the UK, Ireland and EU over customs checks on the Northern Ireland/Ireland border are yet to meaningful impact GBP, but are worth keeping one eye on for any spill-over into the broader UK/EU relationship (perhaps damaging the ability of the two sides to agree on a broad services deal). UK Cabinet Minister Michael Gove will hold a meeting with EU Commissioner Maros Sefcovic on the issue next week. Reuters reported that EU sources were expressing concern regarding a letter from Gove.

Looking ahead, focus will tomorrow be on the release of the latest Bank of England Monetary Policy decision at 12:00GMT. The Monetary Policy Committee (MPC) is expected to maintain the bank’s Base Rate at 0.1% and the size of its Asset Purchase Facility at £895B via a unanimous vote. The bank is also expected to outline its decision on whether or not to include the potential use of negative interest rate policy (NIRP) in its monetary policy toolbox. If the bank does opt to add NIRP to the toolbox, Governor Andrew Bailey is likely to attempt to push back on any expectations that the policy will be employed immediately.

The fact that the UK avoided a no-deal exit from the European Union’s single market at the end of last year and the rapid progress of the UK’s mass vaccination efforts are both causes for optimism at the bank, whilst the fact that the country was thrown back into a national lockdown at the end of last year is a negative, although lockdowns are at this point having much less of a damaging impact on economic activity. The MPC will release updated economic forecasts; analysts suspect the economic growth forecast for 2021 back in November looks to have been overly optimistic, so a downgrade is likely.

GBP/USD key levels