GBP/USD remains well supported above 1.3600 as sterling shrugs off Westminister noise about potential PM replacement

• GBP/USD has been choppy but ultimately remained well supported above 1.3600.
• Sterling continues to shrug off Westminster noise surrounding the potential ousting of UK PM Boris Johnson.
• Focus now turns to Friday’s UK Retail Sales data, which is unlikely to impact BoE tightening expectations much.

GBP/USD has been choppy on Thursday with the US dollar seeing a mixed reaction to weaker than expected initial jobless claims and housing data, though the pair has for the most part remained well supported to the north of the 1.3600 level. At current levels in the 1.3620s, cable looks on course to post an on-the-day gain of about 0.1% or roughly 20 pips. Sterling continues to shrug off Westminster noise surrounding the potential ousting of Boris Johnson from his position as UK PM. Analysts note that his potential replacements, such as UK Chancellor Rishi Sunak (who is the front-runner to replace him), would be unlikely to mark a significant shift in economic policy.

Friday’s UK December Retail Sales report is the only remaining tier-one data of note to cable this week. The data is unlikely to dissuade market participants from pricing in a high likelihood that the BoE hikes interest rate by another 25bps on February 3 in wake of this week’s strong UK labour market and hotter than expected inflation data. That should be enough to keep sterling supported until the end of the week, but traders should also note that the US dollar also faces upside risks in the coming days as traders brace for next week’s Fed meeting. The US central bank is expected to endorse money market pricing for as many as four rate hikes in 2022 and give the green light to a rate hike as soon as March.

It may thus prove difficult to trade GBP/USD based upon central bank divergence. A better play might be to see GBP/USD in the short-term as more of a guage for risk appetite, given sterling risk-sensitive properties. After the major US tech index the Nasdaq Composite fell into “correction” territory on Wednesday (i.e. more than 10% down from a recent high), Thursday has seen some stabilisation (aided by more monetary policy easing in China). If stocks continue to stabilise/tentatively recover in the coming days, GBP/USD may be able to move back towards a challenge of 1.3700.