GBP/USD: UK politics is in the driving seat, BoE in focus also

GBP/USD is around flat on the day so far in a quiet start to the week following a significant correction on Friday with demand for the US dollar that has otherwise been heavily offered at the start of the year. Cable is trading near 1.3680 within a narrow range of between 1.3661 and 1.3676 so far.

The pound may find solace this week on the back of the UK's Gross Domestic Product that was released on Friday which beat expectations. The data suggested that Omicron's impact on growth may ultimately prove modest.

UK politics in focus

In news of late, Prime Minister Boris Johnson may scrap his plan-B Covid restriction in England, the Telegraph on Friday. This could underpin the pound, ultimately, due to prospects of aggressive hawkish actions from the Bank of England. Data will be eyed for heading back to around pre-pandemic levels and inflation will be monitored.

However, UK political events in the UK could hamstring the pound as Prime Minister Boris Johnson is facing calls – also from within the Conservative party – to resign. The PM admitted he participated at a gathering in Downing Street in May 2020, when strict containment rules were in place (Partygate). Labour has argued that the PM may scrap the covid restriction to distract from Partygate. 

In just a few months, Johnson's popularity and sterling's robustness will be tested when local elections are held across England, Scotland and Wales on May 5. For now, this goes in the PM's favour while a civil investigation in Partygate is completed as it is broadly accepted across the party that removing Johnson before this date would be extremely dangerous, as no one could be certain what the consequence would actually be.

Elsewhere, Brexit is a potentially bigger risk for the pound. despite Truss’ first meeting with EU officials seeming to indicate somewhat of a less confrontational approach, the discussions over the Northern Ireland protocol are still set to prove challenging.