- GBP/USD has been swinging but finally remained well supported above 1.3600.
- The pound continues to ignore the noise from Westminster around the possible impeachment of UK Prime Minister Boris Johnson.
- Attention now turns to Friday’s UK retail sales data, which is unlikely to affect BoE tightening expectations much.
The GBP/USD has been swinging on Thursday with the US dollar seeing a mixed reaction to weaker-than-expected initial jobless and housing claims data, though the pair has remained mostly well-supported above 1.3600. At current levels at 1.3620, the pound appears to be on track to post a daily gain of around 0.1% or roughly 20 pips. The pound continues to shrug off the noise from Westminster surrounding the possible removal of Boris Johnson from his post as UK Prime Minister. Analysts say his potential replacements, such as UK Chancellor Rishi Sunak (who is the favorite to replace him), are unlikely to mark a significant change in economic policy.
Friday’s UK December Retail Sales report is the only level one data left to be released this week. The data is unlikely to deter market participants from pricing in with a high probability that the BoE will raise interest rates by another 25bps on Feb 3 on the back of this week’s strong UK labor market and hotter-than-expected inflation data. That should be enough to support the British pound through the end of the week, but traders should also note that the US dollar also faces upside risks in the coming days as traders prepare for the Fed meeting in next week. The US central bank is expected to support money market prices for up to four rate hikes in 2022 and greenlight a rate hike as early as March.
Therefore, it can be difficult to trade GBP/USD based on the central bank divergence. A better play might be to view the short-term GBP/USD pair as a proxy for risk appetite, given the sterling’s risk-sensitive properties. After the main US tech index, the Nasdaq Composite, fell into “correction” territory on Wednesday (ie more than 10% below a recent high), it saw some stabilization on Thursday (helped by further easing of monetary policy in China). If stocks continue to stabilize/tentatively recover in the coming days, GBP/USD could head back towards a challenge of 1.3700.