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The dollar remains the key driver of the pound to dollar exchange rate (GBP/USD).
Like other sterling pairs, GBP/USD fell in Asian FX trade as markets digested news of a tax U-turn by the UK government, but soon recovered as interest rate markets gave a relatively sanguine response to the political fuss.
GBP/USD fell to 1.3107 in Asian but has since pared the loss to 1.3157 in London morning trade.
Instrumental to the recovery was the opening of UK bond markets, which initially fell and then recovered, suggesting there was no market-busting aspect to the government’s plans to fiddle with tax rates.
The exchange rate now holds onto the nine-day exponential moving average (EMA) at 1.3160, and staying above here will help confirm the short-run rebound is still underway.
Above: GBP/USD at daily intervals with nine-day EMA highlighted.
This after the pair fell as low as 1.3010 last week before clawing its way back on account of the dollar’s fall.
Indeed, price action confirms GBP/USD is still at the whims of the dollar side of the equation.
“Broader USD dynamics are shaping GBP/USD,” says George Vessey, an analyst at Convera. “Investor behaviour suggests GBP/EUR is becoming the preferred vehicle for expressing bearish sterling views.”
The dollar has strengthened over recent weeks on account of fading bets for an interest rate cut at the Federal Reserve in December. Where odds of a cut were nearly nailed-on just a month ago, the market now sees a 50/50 chance.
Expectations have since settled around this level, and the dollar has given back some of its recent gains.
Pressing pause on the dollar’s rally happened as soon as investors started to see signs of progress towards ending the U.S. government shutdown, which finally ended midweek.
This raises hopes that official U.S. data would soon start to flow through and offer a firmer anchor for Fed rate expectations.
Given this, investors will likely want to wait and see the results before driving the dollar any higher.
For GBP/USD, this has offered an opening to higher levels. That being said, we don’t think the advance will be substantial and this still looks more of a relief-style recovery.
