GBP/USD fell to a one-week low on Monday, as the greenback held on to recent gains. Still, prospects for the Sterling remain rather positive, analysts noted, while the latest CFTC futures data revealed the largest net long position on GBP since last March.
With a no-deal Brexit scenario now avoided thanks to a last-minute EU-UK agreement in December, the Sterling is generally expected to gain ground against a weakening US Dollar this year.
“The pound is a procyclical currency, and the UK usually profits from investment inflows whenever global growth is strong. After many years of Brexit stress and an undervalued pound this procyclicality might have an even bigger impact than normal,” UBS strategist Thomas Flury and economist Dean Turner wrote in an investor note.
They also underscored that “a successful rollout of vaccinations in the first half of 2021 and an easing of restrictions in the UK, the US, and the rest of the world is, however, a necessary condition for this to play out.”
The US Dollar Index (DXY) extended gains from last Friday and touched a one-month high of 90.901 on Monday, as softening US macro data and a surge in new COVID-19 infections globally prompted caution among market players.
Friday’s report on US retail sales revealed a third consecutive month of decline in December, which brought forth concerns over recovery, especially as health authorities had warned that the worst of the latest wave of coronavirus infections might just lie ahead.
“The market is in a bit of a wait and see mode debating about the dollar, in terms of whether higher U.S. yields could provide support or whether we see further decline,” Bank of Singapore currency analyst Moh Siong Sim was quoted as saying by Reuters.
“I think the balance of risks is still in favor of a reflationary environment, and therefore risk sentiment should stay positive and we should see a further dollar decline.”
Meanwhile, President-elect Joe Biden is to be inaugurated in a heavily-guarded Washington later this week, with tensions remaining elevated following mob violence several weeks earlier.
As of 10:07 GMT on Monday GBP/USD was edging down 0.35% to trade at 1.3529, after earlier touching an intraday low of 1.3520, or its weakest level since January 12th (1.3503). The major pair has retreated 0.94% so far in January, following a 2.54% surge in December.
Monday marks Martin Luther King Jr. Day federal holiday in the United States. Financial markets in the country are to remain closed.
Bond Yield Spread
The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 27.4 basis points (0.274%) as of 9:15 GMT on Monday, down from 28.1 basis points on January 15th.
Daily Pivot Levels (traditional method of calculation)
Central Pivot – 1.3616
R1 – 1.3659
R2 – 1.3741
R3 – 1.3784
R4 – 1.3828
S1 – 1.3533
S2 – 1.3490
S3 – 1.3408
S4 – 1.3325