Sterling has remained resilient to dollar strength in 2021 as the UK's fast vaccine rollout bolsters the prospects for an economic recovery. Whether this scenario can extend will hinge on the dollar's response to upcoming U.S. fiscal stimulus.
President Joe Biden's coronavirus relief package should ensure a robust U.S. economic recovery nL1N2L71KM. The Federal Reserve's dovish stance will help contain rising Treasury yields, which should in turn cap the safe-haven dollar.
A 'buy the rumour, sell the fact response' to the stimulus is a real possibility for the USD.
The major potential risk for sterling is UK-EU friction.
The European Union and UK are due to agree a memorandum of understanding by end-March for informal, regular talks on financial services nL8N2L73FI.
The lack of trust between both sides - evident in the latest spat over COVID-19 vaccines nL8N2L74RX - does not bode well for smooth sailing in financial sector negotiations.
Should the EU play hard-ball, sterling could easily lose its lustre, but that will take time.
Technically, GBP/USD has major support at 1.3751, the lower 21-day Bollinger band, a good indicator of an oversold market, and 1.3752, 61.8% of the 2021 rise. Longs at the current 1.3890 with a stop below 1.3740, looking for a return to the 1.4240 2021 high provide solid risk-reward.
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