- GBP/USD has crawled above the 1.3600 level in recent trade and currently trades close to highs of the day in the 13620s.
- The main event of the day has been Yellen’s testimony to Congress, which did not deliver fireworks.
- The latest daily UK Covid-19 statistics were mixed.
GBP/USD has crawled above the 1.3600 level in recent trade and currently trades close to highs of the day in the 13620s, up about 0.3% or 40 pips on the day. The move has primarily been driven by USD weakness; the Dollar Index has dropped back below the 90.50 mark from earlier weekly highs close to 91.00. As US flow returned after MLK day on Monday, markets have adopted a more upbeat mode (US stocks, crude oil and industrial metals all up).
The main event of the day has been US Treasury Secretary nominee Janet Yellen’s confirmation testimony to Congress; as expected, she called for “big” spending (in line with incoming US President Joe Biden’s stimulus plans) to take advantage of the low rate environment and indicated a hands-off approach to USD exchange rates. Given that most of her testimony was leaked over the weekend, the market reaction to her remarks has been muted. FX market attention now turns to Biden’s inauguration on Wednesday for more on the incoming administration’s plans for the US economic recovery.
The latest daily UK Covid-19 statistics were mixed; on the one hand, cases rose 33,355, another decline and down from over 70K additional cases a little over a week ago. The rapid drop in the infection rate shows that the latest lockdown is working, or at the very least that after meeting with family and friends over Christmas (contributing to the spike to more than 70K cases per day), the nation has drastically reduced its number of social contacts. However, 1,610 were reported to have died after testing positive with Covid-19 in the last 28 days, a new record number daily number that suggests, as far as the hospitals are concerned, the worst is far from yet over.
Meanwhile, according to government sources, top officials are realising that tough restrictions are likely to remain in place in large UK cities perhaps even as late as May given the high level of infections. Much depends on what happens with the death rate over the coming weeks as more and more of the most vulnerable in the UK are vaccinated; most analysts assume there will be a fast drop off in the death rate as those most likely to die acquire immunity. As the death rate drops, policymakers are likely to have a more difficult time in justifying why strict lockdowns should remain in place. Given its vaccination lead, the UK is still likely to be able to fully open up ahead of its developed market peers.
Driving the week for sterling
Next up, Bank of England Chief Economist Andy Haldane will be speaking. On Wednesday, focus will then turn to the release of December Consumer and Producer Price Inflation numbers and then on Friday to December Retail Sales and January flash PMIs.