GS: GBP comments from Ben Stone, LDN G10 Trading – ahead of UK Inflation Report 10:30 today:
Cable breaks above the 200dma as IP surprises to the upside and Sterling’s post-election run continues to impress. The franchise was a better net seller of GBP for corporates throughout the session but saw significant technical demand on the break of the aforementioned level. GBP has likely now become the most developed position in G10 in a very short space of time ahead of the two key domestic risk events today with many unknowns. Inflation report the main point of interest with varying views as to where the inflation forecast will go – when projected to hit 2% again key. Growth however is universally expected to be revised lower given the Q1 GDP miss. The April minutes have skewed today marginally towards the hawkish side of expectations given the observation of market pricing but worth being mindful of the tightening in financial conditions post the election. GBP TWI has risen more than 3% in the past few days and whilst the minutes said GBPs strength was offset by an improvement in Europe, it’s possible that the recent speed of appreciation once again causes concern.
Given the build-up of positioning this makes the risks for a relatively dovish outcome as asymmetric and we have reduced GBP length accordingly to be in a position to buy dips. Levels: 1.5600 first support area below the 200dma with 1.5523 more developed support (post-election highs), very little topside until the 50% retracement at 1.5879. EURGBP 0.7141 – 0.7227.