GBP/USD bounces at 1.3650, but upside capped amid worsening UK/EU tensions

• GBP/USD is off 1.3650ish lows but is seeing its upside capped amid heightened EU/UK tensions.
• The UK/France “fishing row” is escalating and risks evolving into a trade/legal battle.
• FX markets will likely remain subdued ahead of key events this week including BoE and Fed meetings and US NFP.

GBP/USD has seemingly found some support at 1.3650 and in recent trade has gradually risen back to around 1.3675. FX markets are broadly trading with a lack of conviction at the moment and will likely continue to do so ahead of the release of the US ISM Manufacturing PMI survey at 1400GMT. Even then, the rest of the week is packed with risk events, including monetary policy decisions from the Fed, BoE and RBA and labour market data out of the US, Canada and New Zealand – as a result, traders may want to keep their powder dry for now as they see how things play out, reducing the likelihood of big FX market moves.

The heavy manner in which GBP/USD is currently trading - the pair isn’t currently demonstrating much eagerness to challenge its 21-day moving average at 1.3694, the psychological 1.3700 level or resistance in the form of the 18 and 27 October lows around 1.3710 – may be a reflection of concerns regarding UK/France & EU relations. Indeed, there appears to be no end in sight to the rapid escalation of the “fishing row” between the UK and France, with the latter threatening to impose cross channel trade-related restrictions and enforce new restrictions on UK fishing boats in French waters if the UK doesn’t grant more licenses to the French fishing industry, while the latter is now threatening to sue France over these threats. Meanwhile, tensions between the UK and EU as a whole regarding the Northern Ireland Protocol remain front and centre, with the UK on the cusp of triggering Article 16, which would allow it to take unilateral action to address problems with trade arrangements in the country.

Looking ahead to the rest of the week; the aforementioned Fed monetary policy meeting and labour markets reports, as well as the ISM PMI surveys, will be key to watch as indicators of broader USD direction, but for pound sterling, watching how Brexit-related events unfold and Thursday’s Bank of England meeting will be key. At the moment, money market pricing sees the prospect of a 15bps rate hike from the bank (to take rates to 0.25%) as a coin toss. Meanwhile, the bank’s economic forecasts are seen as a key determinant of longer-term BoE rate hike expectations.