- GBP/USD has fallen below 1.3550, weighed down by safe haven demand related to US dollar geopolitics.
- The main driver of risk aversion on Tuesday remains concerns about the Russo-Ukrainian war and how it could affect the global economy.
The GBP/USD it fell around half a point on Tuesday to get back below 1.3350, having rejected a test of session highs below 1.3450 earlier in the day. The pound’s pullback from 1.3435, which marks the highs of the last three sessions, is not too surprising amid the much more dovish tone of the market on Tuesday (stocks lower and yields tumble) that underpins the safe-haven dollar. . The British pound is more risk sensitive than the dollar and therefore GBP/USD is expected to underperform in times of risk aversion.
The main driver of risk aversion on Tuesday is, of course, concerns about the Russo-Ukrainian war and how it could affect the global economy. Investors have been derisking amid anticipation that the fighting will intensify as Russia continues to move troops into Ukraine and uncertainty over how the West’s harsh financial sanctions against Russia could affect the global economy. In particular, tightening expectations by the European central bank took a substantial hit on Tuesday.
That has resulted in a substantial drop in UK bond yields (10y yield down 20bps, 2y nearly 20bps). While US yields are also substantially lower (10yrs 11bps and 2yrs 9bps), rate spreads here have been tilted in favor of the dollar, likely adding to the tailwinds it is experiencing on Tuesday. With traders reducing their BoE tightening bets, market participants will be closely watching upcoming speeches by BoE Monetary Policy Committee (MPC) members Michael Saunders (at 18:30 GMT) and Catherine Mann (at 19:00 GMT).
Beyond a few more BoE statements on Wednesday from other MPC members, the most notable events on the calendar this week are in the US, with Fed Chairman Jerome Powell testifying before Congress on Wednesday and the Thursday, and NFP figures on Friday. As was the case with Tuesday’s strong ISM Manufacturing report that offered modest support to the US dollar, this week’s data should point to continued US economic strength.
But these events are destined to play second fiddle to broader geopolitical developments. For now, the GBP/USD ceiling just above 1.3400 seems likely to hold firm and as long as dollar safe-haven demand remains strong, risks to the pair are tilted to the downside. Some short-term GBP/USD bears may well be eyeing a test of last week’s lows below 1.3300.
Additional technical levels
Source: Fx Street
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