Near-term risks to GBP are to the downside in our view as the market digests the election result.
US CPI and retail sales data for May, released Wednesday, will likely be more important for the USD than the Fed. We remain short AUDUSD targeting 0.72.
We expect the Federal Reserve to deliver its third consecutive quarterly 25bp rate hike at its 15 June meeting, which is fully priced into rates markets. The updated Summary of Economic Projections will likely show some downward revisions to growth, inflation and the long-run equilibrium level of unemployment. Our economists think the language on the balance sheet is likely to change, setting up a formal balance sheet reduction announcement in September.
BNP Paribas FX Positioning Analysis signals the market holds multi-year USD short exposure (Chart 1). Therefore, while we are expecting a dovish hike, the market is seemingly already positioned for this and the USD should be unscathed. More important for the USD should be inflation and retail sales data for May, released Wednesday. We remain of the view that a bounce back in Q2 US growth will prompt the market to increase pricing for Fed tightening after June and according remain short AUDUSD targeting 0.72. We continue to forecast yield spread widening between the US and eurozone, which should ultimately push EURUSD lower.
G10 spot trading desk note that despite Friday’s sell off, GBP has held good resistance levels to the downside:
*GBPUSD 100dma (1.2622) and 200dma (1.2576) have both held. Last time 200dma was breached was when the election was announced on 18th April.
*GBPUSD is still trading above the levels when the election was first announced (~1.26).
*EURGBP held January high and support level we broke out from in Oct flash crash, that both come in at 0.8860.
Trading are of the view that spot needs to break 1.2790 (Friday’s resistance level) for a further move to the topside.
Strategy highlight Damian Green’s appointment (secretary of state) has raised expectations for a “softer” Brexit, although we have yet to hear anything from Theresa May that this will be the case or her intention.