GBP/USD rebounds to 1.3400, boosted by hopes for easing Brexit tensions

• GBP/USD is back to 1.3400 from Asia session lows just above 1.3350.
• The pair is outperforming its G10 counterparts amid hopes that the UK diffuses Brexit tensions.

GBP/USD has seen a modest rebound from Friday’s Asia Pacific session lows just above 1.3350 and is currently trading close to the 1.3400 level. Pound sterling is the best performing G10 currency on what has otherwise so far been a relatively quiet Friday. Nonetheless, GBP/USD appears to be struggling to extend its gains beyond 1.3400 and even if it does manage that, it faces resistance in the form of the prior annual lows in the 1.3410-20 area.

On the week, cable still stands to lose about 0.75%, with the main bearish driver being a broad strengthening of the US dollar (the DXY surged to fresh annual highs above 95.00) in wake of hotter than expected US inflation reports. The only notable UK data was the preliminary estimate of UK GDP growth in Q3, which showed a sharp slowdown in the QoQ pace of growth from above 5.0% in Q2 to 1.3% in Q3, broadly in line with expectations. The next important UK data will be the labour market report on Tuesday. The BoE is paying more attention than usual to labour market developments and wants to see that the unemployment rate didn’t spike sharply in wake of the end of the government’s furlough scheme at the end of September before opting to hike interest rates.

Sterling outperformance as Brexit concerns ease

As to why GBP is the strongest G10 performer on Friday, market commentators are citing a report by The Times that the UK wants to de-escalate Brexit-related tensions with the EU and does not want to trigger Article 16 – this would allow the UK to unilaterally suspend parts of the Northern Ireland protocol that governs the movement of goods in and out of Northern Ireland. According to sources cited in the article, UK Brexit Minister Lord David Frost is keen to emphasise to the Vice President of the European Commission that while the UK is still not fully on board with the bloc’s most recent proposals to reduce checks on goods crossing between Britain and Northern Ireland, they could form the basis of an agreement.

Tensions have been bubbling in recent weeks between the UK and EU over the former’s threats to trigger Article 16 and amid growing speculation that the EU could suspend parts of (or all of) the post-Brexit trade deal in retaliation. France and the UK have also been bickering over access to UK fishing waters for French boats. UK PM Boris Johnson is in Paris on Friday and in talks with French President Macron, where the above-noted issues will undoubtedly by the main topic of discussion. ING thinks “we think the risks for the pound (which is currently showing no political risk premium) are not as high as in 2018/19 when the risk of no-deal Brexit triggered extended periods of GBP weakness”.