GBP/USD bulls have been sent onto the backfoot as greenback spikes
|- GBP/USD spiked but fell back to the start again and sits steady into closing hours on wall Street.
- Brexit, covid and BoE risks are at the forefront of GBP/USD's trajectory.
- US dollar catches a bid as investors weigh the outlook of central banks.
At the time of writing, GBP/USD is flat on the day following a spike to the upside that was met with fierce resistance, sending it all the way back to the start again. GBP/USD is set at 1.3767 after travelling between a low of 1.3757 and a high of 1.3829. Meanwhile, the US dollar has rallied and tested the 94 figures as measured by the DXY index.
The domestic themes in play are positive headlines surrounding coronavirus cases lower in the UK and prospects of lighter restrictions, Brexit, central banks and the UK's budget risks. Across the pond, inflation and the Federal Reserve are propping up the US dollar as investors await the outcome of central bank meetings.
With regards to the Bank of England, money markets are pricing in a rate hike before the end of the year while expectations of further tightening grew as labour market data showed median full-time weekly pay in April was 4.3% above year-ago levels.
Brexit saga continues
On the Brexit front, Britain has threatened to take unilateral action if a solution cannot be found at the ongoing talks, which some reckon could emerge as a serious headwind for the pound. "Uncertainty around the UK's relationship with the EU may intensify in the coming days and possibly act as a check on BoE rate hike bets next week or at the December meeting, as well as set a short-term floor on euro-sterling," Scotiabank analysts said in a note mid-week.
UK budget coming up
However, there are also concerns around potential tax hikes that may be unveiled in Wednesday's budget announcement. Finance Minister Rishi Sunak's budget statement and his plans for higher corporate tax and national insurance contributions alongside more spending are already known in the market, but the fact is yet to be traded. The Chancellor has long been rumoured to be considering bringing capital gains tax rates more in line with income tax, possibly resulting in a switch to 20 per cent rates for people on the basic rate, 40 per cent for the higher bracket and 45 per cent for the additional rate bracket.
Covid Plan B could be avoided
Meanwhile, in recent trade, it has circulated that there could be good news on the coronavirus front. There has been a fall in England's infection rates which raises hopes of avoiding plan B. Expert advising on jabs had warned that the vaccination programme will not be enough to bring current infection rates under control.
However, the British prime minister Boris Johnson has to date resisted pleas from health leaders for tighter restrictions despite the rising number of Covid-19 cases. The PM has been of the mind that vaccines would get the country through the winter and out of the pandemic.
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