Will Sterling Hit 1.45?

Will Sterling Hit 1.45?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Monday’s best-performing currency was , which raced above 1.43 versus the U.S. dollar, extending a rally that has seen zero retracement in the past 7 trading days. There are a number of reasons why investors are buying up the pound but in order for GBP/USD to hit 1.45, economic data needs to validate the rise. While Monday’s strength can be tied to weakness, seasonality, risk appetite and higher U.K. bond yields, the primary reason for sterling’s outperformance is the prospect of a next month. The market is pricing in a 96% chance of tightening but those odds could change drastically if all of this week’s economic reports fall short of expectations. We know that and activity slowed in March while activity held steady. Although we’ll see the April numbers before the next Bank of England meeting, this week’s , and reports are the last of these releases before the May 10 meeting. While consumer spending is expected to fall, inflation and are expected to grow at a healthy pace. We’ll get the first look at whether that’s true with Tuesday’s employment report. If average weekly earnings accelerate like economists expect, GBP/USD will hit fresh 1-year highs near 1.44. However if wage growth slows, profit taking could send GBP/USD back below 1.4250. For GBP/USD to hit 1.45, we would need to see wage growth, inflation and retail sales surprise to the upside this week.

The came under selling pressure Monday after President Trump taunted Russia and China by accusing them of “playing the currency devaluation game as the U.S. keeps raising interest rates.”
This contradicts the Treasury Department’s decision to pass on labeling China as currency manipulator on Friday and suggests that underneath it all, President Trump wants to escalate rather than diffuse tensions with China. Concerns about U.S. policy and mixed discouraged investors from buying dollars despite the rally in the . Consumer spending grew 0.6% last month but , spending growth held steady at 0.3%. While these numbers weren’t terrible they were not strong enough for investors to get excited about the outlook for the U.S. economy, particularly as in the NY region slowed more than expected in April. Comments from Fed officials were also mixed with Fed President talking about volatility tightening financial conditions, seeing little movement in wages and mixed reactions from firms on pricing power. also felt that inflation and wages are growing slowly while Fed President said he doesn’t know how many more hikes are needed in 2018. looks set for a move back to the bottom of its recent range near 106.60. Prime Minister Abe leaves Tuesday to meet with President Trump – so watch for those headlines.

has its eye on 1.24 and Tuesday’s German will be the next piece of data that could determine whether the currency pair breaks this level.
Unfortunately, we fear that investor confidence declined in April as softer economic reports and equity market volatility weigh on market sentiment. According to a survey from Bloomberg News, the outlook for euro area and German growth this year is lower and “this represents the first downward revision in well over a year.” However as important as it may be, EUR/USD won’t live or die by the ZEW survey and as the week progresses, the pair could still rally if the continues to fall.

All 3 of the commodity currencies traded higher on Monday but their gains have been modest.
A decline in had little effect on the , which has been trading in a tight 85-pip range versus the U.S. dollar for the past 4 trading days. are scheduled for release on Tuesday and if the data rebounds as anticipated, paving the way for optimism from the central bank, we could see USD/CAD break the bottom of its range. Stronger than expected lent support to the but with the currency’s rally starting to lose momentum, a sharp rise in may be needed to reinvigorate the bulls. The was in play Monday evening ahead of the and Chinese data scheduled for release. We know that the RBA feels that the global markets are underpricing risks with governor expressing specific concerns at the last meeting about President Trump’s international trade policies. There’s also been talk about China looking at devaluing the and if they choose to do so, it would be negative for the Australian dollar.

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