GBP/USD slips back under 1.3550 as geopolitics-related safe-haven demand keeps US dollar strong

• GBP/USD has slipped under 1.3550, weighed by geopolitics-related safe-haven demand for the US dollar.
• The main risk-off driver on Tuesday remains concerns about the Russo-Ukraine war and how it might impact the global economy.

GBP/USD dropped by about half a percent on Tuesday to back below 1.3350, having rejected a test of recent sessions’ highs in the low 1.3400s earlier in the day. Cable’s fallback from the 1.3430s, which marks the highs of the last three sessions, is not overly surprising amid the much more downbeat market tone on Tuesday (equities lower and yields tumbling) which is underpinning the safe-haven dollar. Sterling is more risk-sensitive than the buck and GBP/USD is thus expected to perform poorly in times of risk-off.

The main driver of risk-off on Tuesday is of course concerns about the Russo-Ukraine war and how it might impact the global economy. Amid anticipation that fighting will intensify as Russia continues to move troops into Ukraine and amid uncertainty about how the harsh financial sanctions implemented by the West against Russia might impact the global economy, investors have been derisking. Notably, expectations for tightening from European central banks has taken a substantial hit on Tuesday.

That has resulted in a substantial fall in UK bond yields (10s down over 20bps, 2s down nearly 20bps). While US yields are also substantially as well (10s down 11bps and 2s down 9bps), rate differentials have in this instance swung in favour of the buck, likely adding to the tailwinds it is experiencing on Tuesday. With traders paring their BoE tightening view, market participants will be closely watching upcoming speeches from BoE Monetary Policy Committee (MPC) members Michael Saunders (at 1830GMT) and Catherine Mann (at 1900GMT).

Beyond some more BoE speak on Wednesday from other MPC members, the most notable calendar events this week are in the US, with Fed Chair Jerome Powell testifying before Congress on Wednesday and Thursday and NFP figures on Friday. As was the case with Tuesday’s strong ISM Manufacturing report that offered some modest support to the US dollar, data this week should point to continued US economic strength.

But these events are set to play second fiddle to broader geopolitical developments. For now, it seems likely that the ceiling just above 1.3400 for GBP/USD will hold firm and, as long as safe-haven dollar demand remains firm, the risks to the pair are tilted to the downside. Some short-term GBP/USD bears may well be eyeing a test of last week’s sub-1.3300 lows.