GBP/USD eases back from multi-week highs above 1.3550, remains well supported as Johnson keeps economy open

• GBP/USD has eased back from earlier session highs above 1.3550, but remains well supported above 1.3500.
• UK PM Boris Johnson again played down the need for tougher UK lockdowns, which may have helped sterling.

GBP/USD has eased back from earlier session highs above 1.3550 (the pair’s highest levels since early November) in recent trade and is back to roughly in line with where it opened on the year in the 1.3520s. That means it still trades higher by about 0.4% or over 50 pips on the day, having rallied from Asia Pacific levels in the 1.3475 area, with Monday’s dip abck towards the 50-day moving average in the 1.3420 area (at the time) now having proven to have been a good entry point for the short-term bullish speculators.

Technicians note support in the 1.3550 area (recent highs) and in the low 1.3400s (this week’s lows and the 50DMA). For now, it seems the pair’s bullish trend, which has seen it rally from lows under 1.3200 as recently as mid-December (a more than 2.5% rally), remains intact. Providing there isnt a sharp downturn for the pair in the coming days, GBP/USD’s 21DMA should cross to the north of its 50DMA, which may increase short to medium-term buying interest in the pair.

GBP/USD was primarily driven by risk appetite and USD flows on Tuesday. Regarding the former, risk appetite remains positive, as emphasises by the recent rallies in long-term developed market government bond yields to price in a more optimistic economic outlook for 2022 and beyond, which seemed to aid GBP on the day. Indeed, risk-sensitive sterling was the second-best performing G10 currency on the day after AUD, perhaps aided by the fact that UK PM Boris Johnson continues to signal that a tightening of lockdowns is not at present needed to curb Omicron transmission in the UK.

The pair was also given a helping during US hours following mixed US economic data (headline ISM manufacturing and JOLTS Job Openings disappointed). But the data has not been interpreted as broadly altering the prevailing narrative of that the US economy is in a state of strong growth, high inflation (though this is expected to ease in 2022) and a tight labour market. This story will receive further inputs later in the week in the form of the ISM Services PMI survey and the official December jobs report, but all arrows at this stage point towards the Fed pressing ahead tightening this year. Wednesday sees the release of the FOMC minutes, which are expected to contain a hawkish bias to reflect the hawkish policy announcement, with traders on the lookout for Quantitative tightening chatter. That suggests upside risks for the USD later this week.