GBP/USD stabilises in 1.3200-1.3240 range during US trade, still set for big daily drop amid risk-off flows

• GBP/USD has been consolidating in a 1.3200-1.3240ish range since US trade began, on course for a daily drop of 0.8%.
• Risk-off related to the Ukraine crisis and commodity price surge coupled with strong US jobs data weighed on the pair.

GBP/USD has been going sideways since the start of US trade, for the most part sticking within a 1.3200-1.3240 range and unable to recover back to pre-US labour market data levels above the 1.3250 mark. At current levels near 1.3220, the pair trades with on the day losses of about 0.9%, putting the pair on course to post a weekly loss of about 1.4%. That would mark the worst such weak since November, but is nothing compared to EUR/USD’s more than 3.0% weekly loss, with the UK economy seen as a little less exposed to the fallout from the Ukraine war versus the Eurozone. Moreover, GBP has the benefit of being able to fall back on higher yields versus the euro and a central bank that still plans to hike interest rates in the near future (for now).

Whilst this has shielded sterling from seeing the same kind of underperformance as the euro, it has not been nearly enough to stop the rot against the buck and prevent cable from sliding underneath its earlier weekly 1.3270-1.3430ish range from earlier this week. The US dollar has two main things going for it versus GBP; firstly, its viewed as a safe-haven currency where sterling is not, meaning this week’s choppy equity market conditions weighed on GBP/USD. Secondly, though the BoE does have a head start versus the Fed having kicked off its hiking cycle at the end of last year, traders are confident that short-term US rates will soon surpass those in the UK. Indeed, the Fed Chair this week gave guidance that the Fed’s hiking cycle will begin later this month with a 25bps hike and be followed by series more over the course of the year.

Powell also noted that the pace of the hiking cycle could well be picked up if inflation doesn’t abate as expected later in the year. That’s much more dovish than the BoE guidance, who emphasised last month that they only see a “modest” hiking cycle. While geopolitics, commodities and risk appetite will be key GBP/USD drivers next week, the theme of BoE/Fed divergence will also be top of mind. US Consumer Price Inflation data for February on Thursday will be the main calendar event, while Friday’s backward-looking UK GDP report probably won’t get much attention as markets reassess growth outlooks in wake of recent geopolitical developments.