GBP/USD testing 1.3800 level, bears eye a drop back to key support at 1.3760

GBP/USD’s fortunes took a turn for the worse upon the arrival of European market participants on Thursday, who opted to sell the pair from its end of Asia Pacific session levels above the 1.3850 mark, driving the currency back towards the 1.3800 level. The big figure is holding up for now, but if the level was to go, this would open the door to what would likely be a rapid drop back to the 1.3760 mark given a lack of notable levels of support in the interim.

A test of support at 1.3760 (the 27 January and 1 February highs) might entice some dip buyers, especially given the fundamental backdrop remains arguably GBP supportive given the lead the UK continues to hold versus most of its other developed market peers in the vaccine rollout rate. Was the 1.3760 level to go, perhaps dip buyers might instead wait for a test of the psychological 1.3700 level, which also coincides quite nicely with the 21-day moving average (which currently sits at 1.3690 but is likely to rise to around 1.3700 in the coming days).

Sterling loses some shine

GBP has lost out versus the majority of its G10 peers (aside from JPY) on Thursday. In all fairness, underperformance is more likely just a result of position adjustment (i.e., some profit-taking) after a period of strong performance recently. Indeed, sterling is still the best performing G10 currency year-to-date, up just over 1.0% versus the US dollar (compared with EUR and JPY, which are 0.9% and 1.5% lower versus the US dollar respectively).

Note that there has been some focus on negative Brexit headlines on Thursday, which some market participants are arguing might be weighing on GBP a little; EU Chief Brexit Negotiator Michelle Barnier said that the EU needs more clarification from the UK before any it makes any decision on financial services equivalence (which would grant UK financial institutions access to EU financial markets).

Note that the UK and EU are working towards a March deadline for a deal on equivalence to be reached. The UK seems frustrated by the delays, with No.10 Downing Street saying on Wednesday that “despite the fact that we've supplied all of the necessary paperwork and are one of the world's most preeminent financial centres, with a strong regulatory system, the EU still hasn't granted us full equivalence.”

Comments from Barnier regarding the need for further clarification come after Bank of England Governor Andrew Bailey warned on Wednesday that there were signs that the EU plans to cut the UK off from its financial markets and cautioned the EU against going down this road.

Services account for 7% of UK GDP and 40% of all UK service exports go to the EU. Thus, a failure of the two sides to agree a services trade deal is likely to weigh on the UK economy in the medium term, and there are already signs that this might have begun; Amsterdam overtook London in January to become Europe’s largest share trading centre in January, seeing an average of EUR 9.2B in shares traded per day versus EUR 8.6B in London.

GBP/USD hourly chart