GBP/USD: Sterling enjoys its reserve currency status – ING

GBP/USD continues to benefit from broader dollar weakness and reserve diversification trends, with FX managers potentially trimming dollar holdings in favor of currencies like sterling. The pair also closely follows EUR/USD moves, as Europe embraces fiscal stimulus. Meanwhile, UK domestic data and the Bank of England’s expected rate cuts remain pivotal, while geopolitics adds a twist as the UK edges closer to potential EU customs cooperation, ING’s FX analysts Francesco Pesole and Chris Turner note.

GBP/USD tracks EUR strength amid reserve shifts

"GBP/USD has been bid up as the dollar trend dominates. We do think FX reserve managers will be cutting the dollar shares in their FX reserves this year. As one of the big five reserve currencies, sterling does benefit from the dollar diversification trade. GBP/USD is also very much driven by EUR/USD trends – where fiscal stimulus will be helping in Europe too."

"Domestically, we’re waiting on the UK data to show whether unemployment is rising or inflation is falling. We think the market is right to forecast three more Bank of England cuts this year, starting in May."

"A wild card for GBP is the UK government getting closer to Europe as strategic alliances get withdrawn. The focus here is the customs union and whether momentum can build towards a deal."