USD dead cat bounceBy Arnaud Masset
The US dollar reversed losses yesterday amid heightening geopolitical tensions in the Middle East. After the Syrian fighting and the Iran nuclear deal came the Gaza killings, following the opening of the US embassy in Jerusalem. After falling as low as 92.24 Monday afternoon, the dollar index surged 0.60% to 92.80. The rise was mostly driven by the debasement of the Japanese yen (-0.50%), the Canadian dollar (-0.20%) and the euro (-0.18%).
The rally is overstretched. April’s retail sales due for release today are expected to ease. However, when excluding auto sales, the measure should have accelerated. The risk is mostly on the downside for the greenback, as a disappointing read could re-fuel worries about US growth. Overall, we are bearish on the buck: the recent appreciation is widely overdone.
GBP overly bearishBy Peter Rosenstreich
Dovishness is overpriced. Current sterling weakness is time to reload GBP long. Longer term, much depends on Brexit: our base scenario is for a EU-UK friendly outcome. We are positioned for a positive swing in oversold GBP on either good news on Brexit or pickup in domestic data.
Sterling has been dragged down by changing Bank of England rhetoric and repricing of the timing/tightening cycle. Since February, weak economic data ended the all-but-sure May rate hike. Yet expectations of monetary policy have become worryingly short sighted. Today’s mixed data on jobs will spark debate. Given the sharp decline in sterling, positive news will have a larger effect on pricing than negative. Evidence of inflation will likely trigger expectations of higher interest rates. As widely expected, the BoE has left the Bank Rate unchanged at 0.5% by a vote of 7-2. Growth is slowing, as it is globally, but the door remains open for an August hike.