GBPUSD Continues to Drop as USD Strength Prevails

GBPUSD continued to drop on Thursday following yesterday’s beat in US ADP data. The overall strength of the USD, as well as expectations that the BoE will hike rates by 25bps today, weighed on Sterling.

In other markets, equities continued to trade soft following yesterday’s sell-off. Financial media blamed the Fitch re-rating, but as we noted yesterday, this should matter very little for markets.

The real culprit to blame for the downside in equities is arguably the increased likelihood of profit-taking heading into summer, as well as the big push higher in yields.

WTI managed to hit its previous range highs yesterday at $82.50 before backing off pretty quickly. Given the recent positive developments on the supply/demand side, the probability of a breakout is higher than a correction.

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In FX, the JPY is leading the major currencies to the upside, as risk sentiment remains sour on the equity side. The GBP is the weakest of the majors, as markets await the Bank of England policy decision, where markets think the bank will downshift hikes to 25bps.

For the Remainder of Today’s Session

The main focus for the remainder of today’s session will be on the BoE decision, as well as the incoming data from the US with Claims and ISM Services.

For the BoE, markets are currently pricing in 34bps of tightening for the bank at today’s meeting. That means, that even the ‘expected’ 25bps hike could see downside in Sterling as money markets price out the additional 9bps that is already priced in.

Apart from the hike, the statement language will also be very important, where markets will want to see whether the bank offers any forward guidance after today’s decision.

The best-case scenario for shorts in Sterling would be a 25bps hike and a clear signal of a pause. The best-case scenario for longs in Sterling would be a 50bps hike and a clear signal that more are coming.

USD Strength Likely to Continue

As the cleanest shirt in the dirty laundry pile, the US has performed really well compared to its peers in recent months. This means that it will take really negative data to really get the USD moving to the downside.

With growth slowing in the EZ, and economic concerns growing in the UK, the US economy and by extension the USD offers more value to investors right now.

Our Preferred Directional Play

Our preferred directional play today would be to look for additional downside in the EURUSD and GBPUSD if we see a very strong Claims and ISM data.

As always, it’s important to note that we don’t follow the ADP employment data as a predictor for NFP (its track record is very bad to predict the NFP outcome). Instead, we follow it as it can impact the forecasts for NFP.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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