GBP/USD defends 1.3800 as covid, Brexit woes battle pre-BOE caution
- GBP/USD kick-starts the key week by challenging bears around mid-April lows.
- Brexit drama continues, Delta variant weighs on UK’s economic optimism but Fitch revised up BOE outlook.
- US dollar remains firm amid rate hike concerns.
- Fedspeak becomes the key amid a lack of major data/events.
GBP/USD bears take a breather around 1.3800, following the heaviest weekly fall since September 2020, amid a quiet Asian session on Monday. While the broad US dollar strength, mainly due to the Fed rate hike concerns, could be cited as the key catalyst behind the cable’s recent weakness, Brexit deadlock and a spike in the UK’s cases concerning Delta variant of the covid also weigh on the quote. Even so, the pair traders await this week’s Bank of England (BOE) meeting for fresh clues.
Friday’s comments from the St. Louis Fed President Bullard were the first post-FOMC comments by US central bankers which kept rate hike concerns on the table. Earlier in the week, the Federal Open Market Committee’s (FOMC) early signals for the Fed rate hike and bond purchase tapering triggered a rush to risk-safety and propelled the US dollar index (DXY) the most in three months.
On the other hand, the European Union (EU) and the UK keep battling over the Brexit issue, mainly concerning the Northern Ireland (NI) border, as policymakers push Britain to keep its word while signed the earlier Brexit deal. The deadlock hardens life in Ireland and hence the looming concerns weigh on the GBP/USD as it becomes London’s responsibility to help Irish voters who backed UK PM Boris Johnson.
Elsewhere, the Delta variant keeps troubling the UK policymakers even if they’re optimistic over the economic trajectory and have already announced a one-month delay to the unlock from the original June 21 deadline. The +10,000 covid infections for the third day and 79% rise in Delta strain cases push the UK’s scientists to predict a third wave of the virus. However, The Sky quotes Brendan Wren, Professor of vaccinology at the London School of Hygiene and Tropical Medicine, while mentioning that having more than 81% of the adult population with a first coronavirus jab, and 59% with both doses is "very encouraging".
It’s worth noting that the weekend news from Reuters relating to the global rating agency Fitch’s upward revision to the BOE’s outlook also favors GBP/USD to probe bears. “Fitch Ratings has revised the Bank of England's (BoE) Outlook to Stable from Negative, while affirming the Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'AA-',” said the news.
Amid these plays, risk barometers like the stock futures and bond yields remain pressured and keep the US dollar bid. However, pre-BOE caution seems to restrict the GBP/USD downside.
Given the light calendar on Monday, as well as chatters over the Fed rate hike, the Fedspeak will be the key. However, Thursday’s BOE will be crucial for GBP/USD as traders awaited policymakers’ confirmation over tapering, which if announced could reverse the latest losses.
Technical analysis
A clear downside break of the 100-day EMA and an ascending trend line from December 2020, respectively around 1.3900 and 1.3985, directs GBP/USD towards late January 2021 tops surrounding 1.3760.