- GBP/USD was seen consolidating in a narrow trading band around mid-1.3400s on Tuesday.
- The UK political crisis acted as a headwind for sterling and capped the upside for the major.
- Modest USD weakness, BoE rate hike expectations extended support and helped limit losses.
The GBP/USD pair seesawed between tepid gains/minor losses and remained confined in a narrow trading band, around mid-1.3400s heading into the European session.
The pair struggled to capitalize on the previous day’s strong move up and witnessed subdued/range-bound price moves through the first half of the trading on Tuesday. The UK political drama – amid growing demand for Prime Minister Boris Johnson’s resignation over a series of lockdown parties in Downing Street – acted as a headwind for the British pound. That said, expectations that the Bank of England will hike interest rates at its meeting on Thursday continued lending some support to the GBP/USD pair.
On the other hand, the flattening of the US Treasury yield curve kept the US dollar bulls on the defensive and extended additional support to the GBP/USD pair. In fact, the spread between 2 and 10-year US government bonds fell below 60 bps for the first time since early November amid the prospects for a faster policy tightening by the Fed. Speculations that the Fed could raise its benchmark rate by 50 bps to combat stubbornly high inflation dampened future growth prospects, which is playing out in the US bond market.
The mixed fundamental backdrop warrants some caution before positioning for a firm direction ahead of this week’s key event/data risks – the BoE decision on Thursday and the US NFP report on Friday. In the meantime, traders on Tuesday will take cues from the release of the final UK Manufacturing PMI. Later during the early North American session, the US ISM Manufacturing PMI, along with the US bond yields will influence the USD price dynamics. This, in turn, should provide some trading impetus to the GBP/USD pair.