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Will the Pound Rebound vs the US Dollar This Week?

April 12, 2021

The GBP/USD exchange rate fell towards the end of last week as Sterling got caught by traders’ profit-taking, but these declines levelled out near a long tested support level by Friday’s close. 

GBP/USD was the largest beneficiary of Q1 trades against the European single currency, with investors selling EUR/GBP, which was worst off last week when markets began to reverse.

Uncertainty about viability of the AstraZeneca vaccine for use with certain demographics likely played a key role, which may also support the GBP as markets settle this week.

The GBP/USD pair ended the week around $1.3707 having found support during the Friday session around $1.3672, an area that has underpinned it previously on the charts and which coincides with the 78.6% Fibonacci retracement of Sterling’s early January extension higher.

“Longer term (weekly, monthly) trend dynamics remain GBP bullish, which rather suggests softness is temporary and that investors should position to buy into GBP weakness,” says Juan Manuel Herrera, a strategist at Scotiabank. 

“Net (DXY/BBDXY) losses on the week still rather favour the idea of the big dollar’s Q1 appreciation reversing from a technical point of view.”

The USD was the third worst performing major currency last week but with little to distinguish between it and the commodity-linked NZD in what is testament to the choppy price action seen by all currencies. The period was marred by profit-taking in various currencies, catching many traders off-guard.

Price action came as Dutch central bank chief Klas Knot floated the possibility of a third-quarter tapering or phasing out of the European Central Bank’s (ECB) pandemic inspired quantitative easing programme (QE), and after the European Centre for Disease Prevention and Control (ECDC) said that continental vaccinations should pick up in the coming weeks.

While the US vaccination programme is still going strong, the ECB’s statement came in contrast to the message from the Federal Reserve (Fed) and is potentially bearish for the USD as well as supportive of GBP/USD. 

Much depends however on the outcome of this week’s US inflation data for March and the pending series of speeches from Fed Chairman Jerome Powell. 

Minutes of the March Fed meeting suggest policy makers are likely to leave interest rates at near-zero levels for what could be years yet, while entries relating to the quantitative easing programme indicated the bank is not even close to tapering off its US government bond buying programme.

The Fed’s stance reflects its new average inflation targeting policy in action, which is a headwind for the Dollar and more so in an environment where the ECB is contemplating an appropriate time to taper its own QE programme. 

“What is most significant this week is that after a much stronger NFP print last Friday (916k versus 660k expected), the 10-year UST bond yield has declined marginally and the US dollar has weakened 0.8%,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. 

“Through much of March we argued in favour of further USD strength on the premise that optimism over synchronised global growth had worsened leaving the US dollar to out-perform. We sense some shift in that and there are early signs of improved optimism. That has prompted us to turn more USD neutral, arguing for a period of range trading ahead with offsetting macro dynamics,” Halpenny says. 

“We have therefore closed our EUR/USD short trade idea but remain long GBP/SEK although that trade has gone against us.”

In between Powell’s two appearances, inflation data for March is out on Wednesday and consensus is looking for a 0.5% gain that month to lift the annualised rate over and above the Fed’s 2% target to land on 2.5%. However, economists see the more important rate of core inflation rising from 1.3% to only 1.6%, while Fed officials have repeatedly said that above-target inflation readings this year are likely to be “transitory” and that they won’t be spooked by them into an early alteration of their monetary policy.

Meanwhile, in the UK there’s little significant data to influence Sterling after the February GDP number is released on Tuesday, where the market looks for a 0.5% rebound to follow the -2.9% decline seen in January. It’s unclear what impact this will have on the Pound given this period was one spent in ‘lockdown’ and the economy is expected to recover sharply through summer as non-essential businesses are allowed to reopen.

It’s possible sentiment toward the Pound will be lifted by the first stage of that reopening this week, which sees “bricks and mortar businesses” permitted to trade from April 12th.

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