GBP/USD consolidates either side of 1.3500 level as traders mull what’s next for sterling

• GBP/USD clings onto reasonable gains that has seen it rise from below 1.3450 to around 1.3500.
• USD weakness is the main driver of the upside, but recent trade has been very subdued as the year-end approaches.

GBP/USD has seen a mild recovery on Tuesday from Monday’s lows under 1.3450 to current levels around 1.3500, an area that has acted as a magnet for the price action for most of the last 12 hours. At present, the pair trades with reasonable gains of about 0.4% or just under 60 pips.

With the risk of a no-deal end to the transition period now having officially been taken off the table (UK and EU officials signs their recently agreed trade deal on Wednesday), there is a risk that trade remains highly subdued amid low volumes into the year’s end. Of course, thin market depth means the risk of volatility is there, and year-end portfolio rebalancing is another factor that might distort the price action.

UK’s near-term economic outlook continues to darken…

Covid-19 cases continue to surge in the UK, with a grim new milestone set Tuesday as more than 50K positive cases were reported for the first time. Meanwhile, in England, the number of people in hospital with Covid-19 has surpassed the April peak and is expected to rise in the coming weeks following increased social contact over the Christmas holidays. The country’s tiered restrictions system will be updated on Wednesday, when Health Minister Matt Hancock delivers a speech to the House of Commons. More areas of the UK are likely to be placed under Tier 4 restriction (the highest tier), though there is also talk of the nation moving back into a March 2020 style lockdown – the government’s scientific advisors reportedly see this as necessary in order to curb rising cases in wake of the spread of the more transmissible strain.

Put simpler; much stricter lockdowns are coming for the UK. The economy, already likely in recession, is likely to see a much more pronounced dip in Q1 2021. Though this is unlikely to be of the same scale at the unprecedented drop seen in Q2 2020, might it be enough to tempt the Bank of England to take interest rates into negative territory?

All of this sounds like a very bearish combination for GBP, but as noted in an earlier post, the UK is currently a world leader when it comes to getting its population vaccinated against the virus and that lead might well widen further after the UK becomes the first country in the world to authorise the Oxford University/AstraZeneca vaccine for emergency use, expected later in the week. So while the near-term outlook looks grim, might the light at the end of the UK's tunnel be a little closer than the light at the end of other country's tunnels? This might ultimately be a GBP positive.