GBP Drops, Market Confidence Dwindles Following Dollar Rebound

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Following a minor intraday rise to the 1.3855 level, the GBP encountered a new supply on Tuesday and fell for the second day in a row. The decline pushed the major market farther away from multi-week highs, which had been set in response to Friday’s poor headline NFP data, and was fueled by several factors.

As the UK prepares to prolong Northern Ireland’s grace periods, Brexit woes continue to weigh on the GBP. It intends to prolong some post-Brexit grace periods for products imported into Northern Ireland. The GBP is also losing ground against European currencies, owing to the government’s decision to boost taxes.

The GBP/USD pair had lost over 35 pips from daily highs and was trading around 1.3780. On Tuesday, the pair struggled to consolidate on its modest intraday gains, instead of encountering resistance near 1.3855 and turning lower for the second session in a row. The drop was only fueled by the emergence of some US dollar buying, which was accompanied by a substantial rise in US Treasury bond yields.

The break of 0.8601 resistance in EUR/GBP implies a continuation of the rally from 0.8448 to 0.8668 barrier. Stay updated on 1.3730 support in GBP/USD and 151.32 support in GBP/JPY. If these levels are broken, additional Sterling weakness is likely.

As investors digested Friday’s poor headline NFP number, expectations for a Fed taper announcement pushed the yield on the benchmark 10-year US government bond closer to 1.35 percent. At the November FOMC meeting, market participants expect the US central bank to unveil the tapering schedule.

GBP: BoE Saunders Apprehensive of  Continuous Asset Purchase

The GBP/USD pair encountered a new supply on Tuesday and fell for the second day in a row. The decline pushed the major market farther away from multi-week highs, which had been set in response to Friday’s poor headline NFP data, and was fueled by several factors.

Bank of England Michael Saunders stated that the economy has returned to pre-pandemic levels. He is afraid that the asset purchase program’s continuation may enhance medium-term expectations.

“I also worry that continuing with asset purchases, when CPI inflation is 4% and the output gap is closed – that is the likely situation later this year – might well cause medium-term inflation expectations to drift higher,” he said.

“Such an outcome could well require a more substantial tightening of monetary policy later, and might limit the committee’s scope to respond promptly the next time the economy needs more stimulus,” he added.

During the mid-European session, intraday selling in the pound picked up steam, dragging the GBP/USD pair to three-day lows around the 1.3770-65 range in the previous hour.