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  • richard evans

GBP breaking higher against EUR

Good morning

Welcome back after the long weekend. Friday seems a long time ago now but let’s start with the US nonfarm employment numbers that were released back then.

The headline figure was stronger than expected and the unemployment rate was a touch lower which sent USD higher with GBPUSD and EURUSD slipping back below 1.2600 and 1.1000. However the previous reading was revised sharply lower which offset much of the current month strength, and USD quickly lost much of those gains. Since then we have seen GBPUSD trade up to 1.2665 and EURUSD to 1.1050 although as I type they are back to 1.2615 and 1.0985.

GBP’s relative strength is noted against EUR with GBPEUR now within a few points of 1.1500. You will remember I’d highlighted that 1.1450 area which had held since late 2022, we have now broken through there and some technical traders are likening the move to mid-2020 when the pair was capped at 1.1285 or so from June 2020 until Jan 2021 when it finally broke higher and traded up to 1.1800 by April.

So this data will make life difficult for the Fed. On one hand the incoming data is strong, on the other hand the bad news seems to be lagging, almost as though the US are deliberately preparing us for some bad news while keeping things looking rosy for the time being in order to prevent a full-blown USD sell-off. The markets are pricing in rate cuts in the second half of this year and although Powell insists things are still going swimmingly the market is doubting his supportive words. He had said the banking crisis was behind us but each day there seems to be a new regional bank coming under pressure.

The other issue facing the US is this debt limit. I haven’t written much about it as it does rear its head every now and then but generally ends in an agreement to raise the limit. However I’ll mention it now as Yellen warned over the weekend about the dangers to the US economy and the financial markets as a whole should US default on its obligations. She also mentioned the risk to the US dollar as a reserve currency should the US default, or even see their credit rating drop. Now all this seems unlikely but we must have learned by now that things do happen, however unlikely they may seem. Trump as President, Brexit, Covid, Truss, Russian invasion of Ukraine, to name but a few. I do still think an agreement will be found but we should prepare just in case.

A fairly light calendar today although I did read somewhere that several ECB officials are speaking today, I can’t see timings of those, but it will be interesting to see if they make any comment about their own view on the 25bps rise last week. We have US CPI tomorrow and then Thursday we have BoE rate announcement. Recently both EUR and USD have failed to make gains after rate rises. We wait to see whether GBP can buck that trend. A 25bps rise is expected, I did also see that there has been some talk that UK rates may need to reach 5%. As usual though, with this rate rise priced in, the near-term fate of GBP will be more down to the wording in the accompanying statement.

Just in case we do see GBP push higher I’m looking at a one month 1.1550 GBPEUR call which costs £3000 per £1m notional, I’m also wondering about a short-dated upside GBPUSD idea to cover the BoE announcement, a one week 1.2650 GBPUSD call cost £3,500 per £1m notional. For a cheaper play, the Friday expiry 1.2600 call which knocks out at 1.2775 costs £2,500

Running out of time this morning so i’ll have to cut this shorter than I’d planned. I’ll end though by saying I did watch the coronation and I was pretty impressed with the spectacle. In my ignorance I admit I had not realised quite what a religious event the coronation is, but when you think of how far back in history the ceremony goes it makes more sense. Being something of a military aircraft buff I was a bit disappointed that the flypast was greatly reduced due to the weather, however I did also watch the coronation concert on Sunday night and got my share of flying things with a spectacular drone display. All in all a pretty good show all round.

I know there is some unhappiness over the arrests of protestors, but I do think there is a distinct difference between having the right to protest and the right to disrupt. Let the protestors onto the streets today, I don’t have any issue with that whatsoever but I actually think the police did a decent job in ensuring the vent went without a hitch.

- 15.00 ECBs Lane speaks

- 00.01 UK BRC retail sales

- 02.30 AUS retail sales

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