GBP/USD contained in mid-1.3600s as traders await key risk events

• GBP/USD trades subdued around the 1.3650 level amid a slightly risk-averse tone to markets.
• Traders are keeping their powder dry ahead of key events later in the week in both the UK and US.

GBP/USD continues to trade with a slight negative bias as US market participants enter the fray ahead of the start of the US trading day, though for now, the price action is subdued, in a continuation of the trading conditions observed on Monday. The pair dipped as low as the 1.3620s this morning (fresh near-three week lows), but has since recovered some poise to trade around the 1.3650 mark, which leaves it down about 0.1% on the day.

Broader market conditions are slightly risk-off, with European equities mostly lower following a downbeat Asia Pacific session handover, and crude oil and other commodity prices coming off the boil a little this morning. This seems to be lending FX havens (excluding CHF, which appears to be retracing some of its recent outperformance) some support, hence why JPY is the best G10 performer this morning, why USD is not far behind it and why the more risk-sensitive G10 currencies (AUD, NZD, NOK, CAD) are the worst performers. A risk-averse tone to markets goes a long way as to explaining why GBP/USD is subdued this morning.

Looming Risk Events

Moreover, looming risks events later in the week may be discouraging market participants from placing big bets on the GBP/USD pair, with participants perhaps opting instead for patience as they await the outcome of Thursday’s Bank of England rate decision and how UK/France fishing negotiations and UK/EU Northern Ireland Protocol talks unfold. With regards to the latest on the UK/France “fishing row” that has threatened to spill over into a trade and legal battle, the latest reports suggest that Brexit Minister Lord David Frost will be travelling to Paris for discussions with the French Minister of State for European Affairs Clement Beaune on Thursday, and it seems the French will hold off on imposing retaliatory measures against the UK over its fishing-related grievances until talks have concluded.

With regards to the Bank of England meeting; the outcome is still seen as highly uncertain. Money market pricing of future UK interst rates seems to imply a 15bps rate hike is now priced in, but economists remain divided (as do the BoE voters). The key questions that markets are awaiting answers to on Thursday are 1) will the bank hike or not? 2) what will the voting split on hiking be? 3) will the bank’s inflation forecasts justify hawkish money market pricing for further rate hikes in 2022 and 2023?

Remember also that there are key economic events this week in the US, including Wednesday’s Fed policy announcement (QE taper is expected to be announced) and Friday’s October Labour Market report that could drive volatility in GBP/USD through the US dollar channel.