GBP/USD hits near-two week high, rallies into mid-1.3200s as buoyant risk appetite weighs on buck

• GBP/USD hit a near two-week high above the 1.3200 level on Tuesday rising, as much as 0.7% to the 1.3250s.
• The pair has been underpinned by strength in risk appetite as global equities move higher, resulting in a weaker USD.
• GBP/USD’s breakout above resistance in the 1.360-1.3200 are could be a key technical milestone, but UK fundamentals are weak.

GBP/USD hit a near two-week high above the 1.3200 level on Tuesday, rising as much as 0.7% to the 1.3250s as a continued push higher in global equity markets spurred risk appetite in currency markets. Though it remains well supported against its more interest rate sensitive safe-haven peer the yen, post-hawkish Fed Chair Jerome Powell US dollar strength on Monday has proven short-lived versus most of the buck’s G10 peers. While markets are upping bets on a more aggressive and further-reaching Fed tightening cycle, optimism that the new policy switch is “appropriate” given the backdrop of high inflation and a hot US labour market seems to be supporting sentiment.

The ongoing improvement in risk appetite, to which pound sterling is normally quite sensitive, has been able to overpower recent dovish BoE-related weakness in GBP/USD. Of course, that means that if global equities do start selling off again, the pair is at risk of giving up its newfound 1.32 status once more. There are still plenty of reasons why there could be a swift reversal lower in stocks; the Russo-Ukraine war (maybe Russia starts chucking chemical weapons around), a toughening of Western sanctions against Russia (potential EU embargo of Russian oil) and a worsening of the China Covid-19 outbreak to name a few.

GBP/USD’s breakout above key resistance in the 1.360-70 area and the 1.3200 level is a key technical milestone that opens the path towards a (technically driven) push towards 1.3300. Indeed, the pair has already bounced off of resistance in the form of the late-February/early March lows in the 1.3275 area. While the main driver of GBP/USD at present is currently a macro story of risk-on, if that switches back to forex fundamentals and central bank divergence, the UK economy’s comparatively weaker position and the BoE’s comparatively more dovish stance weakens the prospect for a sustained rally.

Looking to the immediate future, focus is on February UK Consumer Price Inflation data scheduled for release on Wednesday, to then be followed by another speech from Fed Chair Powell, ahead of flash UK and US PMIs on Thursday.