BNP Paribas G10 FX trade idea of the week: short EURGBP

From the FXWW Chatroom: We favour shorting EURGBP ahead of several key data releases in the UK this week. Wage data in the employment report (Wednesday) will likely be the most important release. Despite the Bank of England’s (BoE) latest message suggesting that interest rates may need to rise faster than is currently priced in by the markets, UK front end yields are still pricing a very dovish BoE profile. The May inflation report assumes that wage growth will only pick up during 2018. Therefore, UK rates have significant room to adjust higher for a rate hike in case there are signs of wage acceleration, which should benefit GBP.

Our economists also expect UK April CPI (Tuesday) and retail sales (Thursday) to rebound this week, with retail sales significantly above market expectations.

Our models continue to suggest the GBP is very undervalued, but especially versus the EUR. Our BNP Paribas FX Positioning Analysis suggests that GBP short positioning has recently been cut, but an analysis of bilateral EURGBP positioning is still showing a long exposure at +18 (scale of +/- 100), which suggests the potential for further GBP strength versus the EUR.

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