GBP/USD whipsawed on Thursday, falling to the day's low 1.2446 after a dovishly interpreted BoE decision to hold rates steady, then rallying toward 1.25 after above-forecast U.S. jobless claims, leaving sterling in a cautiously negative trend as traders await U.S. and UK inflation reports in the next two weeks.

An unexpected increase in the number of MPC members voting for a rate cut -- with Deputy Governor Dave Ramsden joining Swati Dhingra -- produced the dovish impetus.

That heaped downward pressure on GBP/USD before the jobless claims brought the pound some relief, with traders now awaiting the U.S. CPI report on May 15 and UK inflation data on May 22.

The dovish BoE hold initially lifted BoE June cut odds, as expressed on LSEG's IRPR page, to near 60%, before falling back to 45%, which facilitated cable's rise off session lows to 1.2500.

Considering the steady GBP/USD fall in the past week from Friday's post-payrolls high at 1.2634, recent shorts may lighten positions ahead of the weekend.

However, any combination of CPI reports that hints at a widening of U.S.-UK rate spreads is likely to reignite bearish GBP/USD tones, putting the April 22 2024 low at 1.2299 in focus.

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Synopsis:

BofA provides an analysis of the upcoming US CPI report for May, predicting continued high inflation levels that may cause discomfort for policymakers. This forecast comes amid expectations for slight moderation but persistent pressure on core inflation metrics.

Key Points:

• Headline CPI Forecast: BofA anticipates a 0.3% month-on-month increase in headline CPI for May, with a year-on-year rate potentially ticking down to 3.4%. The headline NSA index is projected to reach 313.621.
• Core Inflation: Core CPI is also expected to rise by 0.3% month-on-month (0.28% unrounded), indicating a moderation from the first quarter's average of 0.37% month-on-month but still high enough to cause concern.
• Implications for Federal Reserve: The predicted levels of inflation are likely not sufficient to assure the Federal Reserve, suggesting continued vigilance in monitoring inflationary pressures.

Conclusion:

BofA's forecast for the May CPI underscores the ongoing challenge faced by the Federal Reserve in combating inflation, which remains above comfortable levels despite some signs of moderation. The report will be crucial for shaping monetary policy decisions, particularly if inflation metrics do not show significant easing.

Synopsis:

Société Générale has updated its outlook on EUR/GBP, raising the floor for buying the currency pair from 0.8500 to 0.8600. This adjustment reflects the ongoing economic and political uncertainties in the UK, which may limit the pound's resilience against the euro.

Key Points:

• Bank of England's Recent Decision: The MPC’s decision to hold rates steady was expected. The market's fluctuating expectations for a rate cut reflect uncertainty about the timing of policy easing, with a fine balance between June and August.
• Rate Differential and Currency Valuation: The current EUR/GBP levels are considered low relative to shifts in rate differentials between the UK and the Eurozone. Historical comparisons suggest that the pound may be slightly overvalued.
• UK's Economic and Political Landscape: SocGen highlights potential challenges due to the UK's political climate and fiscal constraints, which could affect GBP's performance.

Conclusion:

SocGen sees a shift in the strategic buying levels for EUR/GBP, suggesting increased caution towards GBP strength. The bank anticipates that GBP may underperform against major European currencies through the end of the year, advising a more conservative approach to trading EUR/GBP based on recent and expected shifts in monetary policy and broader economic indicators.

• Cable falls to 1.2446, its lowest level since April 24, on BoE's dovish hold

• Ramsden joins Dhingra in voting for rate cut. UK CPI forecasts lowered

• 1.2471 was Ldn am low for GBP/USD (pre-BoE). BoE presser starts at 1130 GMT

• If BoE cuts rates in June, it will likely be by narrowest of margins, 5-4

• 1.2427, 61.8% Fibo of 1.2299-1.2634, and 1.2400 are GBP/USD support points

• Fed's communications style scores well with analysts but not public

The positive impact on German exports to the United States from the relatively low EUR/USD exchange rate may help to keep the U.S. as Germany's top trading partner into November's U.S. presidential election.

EUR/USD has traded sub-1.09 through the second quarter-to-date, thereby maintaining its chunky discount to the approximate 1.21 mid-point of its lifetime range (0.8228-1.6040, EBS levels).

The U.S. overtook China as Germany's most important trading partner in the first quarter of this year, according to Reuters' calculations.
China was Germany's top trading partner in 2023 for the eighth year in a row.

Data published earlier this week showed German exports to the U.S. rose by 3.6% in March.

Events will dictate whether the U.S. remains Germany's top trading partner beyond November 5. "Trump trade advisers plot dollar devaluation" was the headline of a Politico article published last month (April 15).

Related comment: nL2N3GZ0PG

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Trade flow in forward looking FX options can offer clues about the direction and potential volatility of a currency pair and there's a clear theme at work in USD/JPY.

Demand for USD call/JPY put options has increased over recent sessions and would suggest that more traders are expecting USD/JPY to return toward 160.00 over coming weeks and months.

There has been an increasing number of trades with buyers of strikes between 156.00 and 160.00 with expiries between 2-weeks and 2-months.
However, some of these options have upside triggers (RKO) attached above 160.00, levels where the BoJ is assumed to have initially intervened.
The trigger can significantly reduce the initial cost of the option, although the option is dead if the trigger trades at any time before the expiry.

For example, with USD/JPY at 155.85 - a regular 1-month expiry 156 JPY put/USD call vanilla option allows the holder to buy USD/JPY at 156.00 at expiry for an up-front premium of 132 JPY pips.
The profit potential is unlimited above the 157.32 break-even point.
By comparison, a 1-month expiry 156.00 JPY put/USD call with a knockout trigger at 160.00 has a premium of just 23 JPY pips, making the break-even 156.23, but capping the profit potential and killing the option if 160.00 trades any time before expiry.

Extending the duration to expiry and/or lowering the trigger will reduce the premium further, with a 2-month 156.00 RKO 159.00 costing a mere 4 JPY pips.

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• AUD/USD traders are talking about option hedging influencing AUD/USD Thurs

• Early Asia bounce, despite a lack of news, said to have been option related

• Some huge option strikes do actually expire 10-am New York/3-pm London Thurs

• A$3.5-billion between 0.6525-50, A$4-billion 0.6600-35 nL1N3HC0E3

• Those with exposure often cash hedge near strike to neutralise currency risk

• That hedging typically increases as expiries draw closer

• AUD/USD options might just offer the best value in G10 FX nL1N3HB0WA

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• EUR/USD failed to register a daily close under the 1.0611 Fibo in April

• 1.0611 Fibo is a 76.4% retrace of the 1.0448-1.1139 (Oct-Dec) EBS rise

• 14-day momentum is positive, highlighting the overall upside bias

• A break above the daily Ichimoku cloud would be quite a bullish sign

• The daily cloud currently spans the 1.0827-1.0838 region

• However a close back under the tenkan line at 1.0731, would be negative

• EUR/USD Trader TGM2334. Previous update nL1N3HB0M6

• Cable eases to 1.2482 before BoE rate decision: dovish hold expected

• 1.2482 = intra-day low. 1.2469 was one-week low after Riksbank cut Wednesday

• Ultra-dovish hold from BoE at 1100 GMT could depress GBP/USD towards 1.2400

• Cable was below 1.24 on April 23 (before pound rose on BoE's hawkish Pill)

• Markets currently see 47% chance of BoE rate cut in June 0#BOEWATCH

• UK election winner should scrap debt cut target, think tank NIESR says

• Not a smooth move lower but the bias remains bearish

• Wednesday long lower candle shadow hinted at supply fade

• Early Thursday action tight within a 1.2490-01 range

• Initial support at 1.2467, May 1 low

• Bears can target a 50% Fibo level at 1.2434, off 1.2299-1.2569

• Fourteen day momentum yet to confirm price drop but RSI pointing down

• We lean bearish but wait for stronger signals

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• Steady in a tight 1.0742-1.0751 EBS range in a low-key FX session in Asia

• German and French bank holidays, so likely quiet into the BoE rate decision

• EUR/GBP flows may lead EUR after the decision - expecting a dovish hold

• Charts- neutral 5, 10, and 21-day moving averages, momentum studies conflict

• 21-day Bollinger bands expand - bounce stalled awaiting the next trigger

• 1.0790 upper 21-day Bolliger band and last week's 1.0812 high key resistance

• Friday's 1.0724 base and last Thursday's 1.0675 low are initial supports

• 1.0750/55 1.242 BLN and 1.0760 1.003 BLN are the close strikes for May 9th

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Synopsis:

ING predicts that the upcoming Bank of England (BoE) meeting will not significantly weaken the GBP, despite the current bearish positioning ahead of the event. The EUR/GBP rate has shown resilience early this week, influenced by recent US monetary policy events.

Key Points:

• EUR/GBP Resilience: The pair has maintained levels above 0.8600, finding support from shifts in the EUR:GBP short-term rate differential post-US monetary developments.
• Sensitivity to Fed Pricing: The sterling curve shows more sensitivity to Federal Reserve movements than to those of the European Central Bank, influencing the current market stance on GBP.
• BoE Meeting Expectations: While the market has adopted a bearish view on GBP due to external factors, ING does not foresee the BoE's upcoming decision causing further significant weakening of GBP.

Conclusion:

ING suggests that the GBP's response to the BoE meeting may be subdued, with limited additional weakening expected. The bank advises keeping an eye on the EUR/GBP pair as it navigates through central bank influences from both the Fed and the BoE.

• AUD/USD consolidates in a narrow but well supported 0.6569-0.6583 range

• Steadies as bargain hunters emerge after 1.35% drop from Fri 0.6650 high

• Likely to stay bid on dips as traders mull higher-for-longer RBA rate stance

• RBA's more hawkish stand contrasts with easing bias of most other DM c.banks

• AUD/JPY sought on dips despite Japan's verbal warnings on JPY

• Supports 0.6560 and 0.6541, the 38.2% Fibo retracement of April-May rally

• Resistance 0.6600-05, 0.6625-30, 0.6645-50; China trade dataawaited

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• Off 0.05% early after closing down 0.1% with the USD up 0.1%

• Charts; 5, 10 & 21-day moving averages plus daily momentum studies conflict

• The Bank of England rate decision will likely leave GBP sidelined in Asia

• Rates on hold with a cautious but more dovish tone is expected from the BoE

• 5, 10 & 21-day moving averages slip - as 21-day Bollinger bands edge lower

• Daily momentum studies show mixed signals - charts turn net negative

• Resistance starts at Tuesday's 1.2568 top then at Friday's 1.2634 high

• 1.2466/67 0.5% of April/May rise and last week's base are initial support

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• Steady early, closed down 0.1% with the USD up 0.1% - likely low-key in Asia

• Yield spreads a touch tighter, 10yr bund +4bp 2.460%, 10yr UST +3bp 4.492%

• ECB can cut rates in June but should rethink how it sets policy - Wunsch

• Current ECB models miss large economic shifts, struggle with extreme events

• Charts - neutral 5, 10, and 21-day moving averages, mixed momentum studies

• Horizontal 21-day Bollinger bands - bounce still stalled, no strong bias

• 1.0790 upper 21-day Bolli band and last week's 1.0812 high key resistance

• Friday's 1.0724 base and last Thursday's 1.0675 low are initial supports

• 1.0750/55 1.242BLn and 1.0760 1.003BLN are the close strikes for May 9th

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• AUD/USD cautiously bid Thu as traders mull higher-for-longer RBA rate stance

• RBA rate expectations diverge from those of other major c.banks, supports

• Markets now do not expect a RBA rate cut until April next year

• Fed rate cut chances in Sep at 66%, BOE cut priced in for Sep, ECB in June

• Bargain hunters emerge after 1.35% drop from Fri 0.6650 high

• Supports 0.6560 and 0.6541, the 38.2% Fibo retracement of April-May rally

• Resistance 0.6600-05, 0.6625-30, 0.6645-50; Wed range 0.6599-0.6558

• AUD/JPY moves and China trade data key for direction in Asia

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Synopsis:

Danske Bank anticipates a rise in the EUR/GBP exchange rate following the upcoming Bank of England (BoE) meeting. Expected dovish adjustments in the BoE's stance and communication could influence market perceptions and currency valuations.

Key Points:

• Unchanged Bank Rate: Danske predicts the BoE will maintain the Bank Rate at 5.25%, with a voting split of 7-2, aligning with market consensus.
• Dovish Shift: Expectations lean towards a dovish pivot, with potential signals from the BoE about the commencement of a rate-cutting cycle, likely starting with a 25 basis point cut in June.
• Inflation Forecast Revision: The BoE may adjust its medium-term inflation forecasts downward, which could further support a dovish outlook.
• Market Impact: Such dovish developments are expected to weaken GBP against EUR, leading to an increase in the EUR/GBP rate by the day's end.

Conclusion:

Danske forecasts a higher EUR/GBP exchange rate as a result of the BoE meeting, driven by anticipated dovish shifts in monetary policy outlook and inflation expectations.

The dollar index rose 0.15%, with EUR/USD down 0.1%, hovering above Wednesday's lows that erased the rally triggered by Friday's quite dovish U.S. data, as the focus shifts to the May 15 CPI and retail sales reports, and as the yen continued to slide broadly.

EUR/USD only briefly recovered from Wednesday's 1.0735 low by the 50% Fibo of last week's rally and other nearby supports, moving in line with bund-Treasury yields spreads.

The dollar was broadly higher earlier in the day as its Treasury yield-led drop following Friday's dovish U.S. jobs and ISM reports came in for a further correction, except against the yield-bereft yen.

The durability of that correction will next be tested by the May 15 CPI and retail sales data.
Presently, the Fed is priced to likely cut rates in September and December, while the ECB is expected to begin easing next month, with three cuts by year-end.

Those Fed and ECB market outlooks haven't been influenced much by this week's second-tier economic data or Fed speakers, though Federal Reserve Governor Lisa Cook's fairly sanguine comments regarding the financial shape of households, banks and firms may have aided a late firming of Treasury yields and the dollar.

The Riksbank rate cut on Wednesday followed the SNB's recent move and is seen setting the stage for the ECB to also ease.
The pace of easing in Europe will be governed to some extent by the pace of Fed cuts, because too much policy divergence could cause dollar gains and European import price inflation.

USD/JPY rose 0.58%, extending its recovery from last week's 160.245-151.86 dive on suspected MoF interventions, culminated with Friday's weak U.S. data.
Prices are now nearing the mid-point of that plunge at 156.05.

There is some concern that the yen will be propped up again if it falls toward last week's peak, but the 20bp of further BoJ rate hikes priced in by year-end hasn't shifted amid hints the BoJ might have to carry more of the yen supporting load for the MoF.

Sterling fell 0.1% on the approach to Thursday's BoE meeting that is widely expected to leave rates unchanged.
The focus will be on whether there are more votes for rate cuts, and from whom.

Markets currently fully price in a first BoE rate cut in August and one more before year-end.

Wednesday's 1.2469 sterling low nearly retraced 50% of the April-May 1.2299-634 rebound that faltered between the 100- and 200-day moving averages, as Gilts-Treasury yield spreads bearishly diverged from Friday's high, and gains linked to risk-on flow faltered this week.

Aussie fell 0.33%, extending its pullback from May, April and March highs near 0.6650, the reciprocal of which is 1.5, this week after another RBA hold and softer Australian retail sales.

U.S.
jobless claims on Thursday will get a look as a nearly real-time gauge of the labor market, the condition of which appeared to cool in last week's payrolls and JOLTS reports.

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• USD/JPY rose 0.58% as MoF, BoJ yen support efforts continued to fail

• Japan's MoF and BoJ continue to lean against the yen's weakness

• But even with dovish US data on Friday, USD/JPY quickly rebounded

• And did so after finding support by 2023/22 peaks near 152

• Prices now nearing 50% of last week's collapse, April 30 low at 156.05/08

• Big drops in Tsy-JGB ylds spreads appear to have bottomed out

• Those spreads remain attractive as is low-yield yen as a funding currency

• Focus beyond possible intervention risk is US CPI, sales data May 15

• Wed's Fed speakers supported Treasury yields and the dollar

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• AUD$ extends weakness, -0.3% at 0.6577; Wednesday range 0.6599-0.6558

• More-dovish Fed rate expectations ebb, dovish RBA hold stirs selling

• AUD/USD reprieve with slide halted by 200-HMA nL1N3HB1IF

• Long AU yields lower this week, as is copper HGv1 -1.3% aids AUD decline

• Relative rates in AUD favor; IRPR shows RBA on hold, Fed -44bp into YE '24

• Focus for now remains on When US will begin to cut; Sept cut at 80% odds

• AUD$ supt at Wednesday's cloud twist by 0.6555, 55-DMa at 0.6537

• Res 100-DMA at 0.6580, 0.6599 Wed high, 0.6650 upper 30-d Bolli/May 3 high

• Bulls in control abv 0.6506, 50% of 0.6363-0.6650

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Synopsis:

TD examines the current state of the FX market, describing it as delicately balanced between order and chaos following recent Federal Reserve actions and Non-Farm Payroll data. The market's focus is increasingly on inflation trends, which have become a significant driver beyond the traditional growth metrics that typically influence currency movements.

Key Points:

• Market Dynamics: Post-Fed meeting and labor market data have brought some stability, yet the potential for disruption remains as political and economic uncertainties loom.
• Data Dependence: The immediate future of the FX market appears heavily dependent on incoming economic data, with inflation taking center stage.
• USD Positioning: The US dollar is currently trading at a premium, with positioning stretched, suggesting that any shifts in macroeconomic signals could lead to significant market movements.
• Strategy Outlook: Despite potential volatility, TD views dips in USD strength as opportunities for buying, given a macroeconomic environment that favors the US dollar.

Conclusion:

While the FX market currently exhibits a semblance of order, underlying factors suggest potential for sudden shifts towards chaos, driven by economic data and geopolitical developments. Investors are advised to remain vigilant, focusing on inflation indicators and technical analysis to navigate the uncertain terrain ahead. This approach will be crucial as global markets continue to digest shifts in US economic policy and broader geopolitical risks.

Sterling weakness extended in early NorAm trading as the pound matched a one-week low at 1.2467 amid position adjustments ahead of Thursday's BoE rate vote and presser that appears to carry dovish risks that could put further pressure on the pound.

The BoE is almost unanimously expected to hold rates steady on Thursday, as indicated on LSEG's IRPR page.
As such traders will focus on the vote tally before turning attention to U.S. CPI May 15 and UK CPI data on May 22.

Should other BoE governors join Swati Dhingra voting for a 25bp rate cut, market expectations for a June cut are likely to rise from current odds near 50% and would likely send GBP/USD tumbling toward support at the April 24 low 1.2423 and perhaps the April 22 2024 low at 1.2299.

No doubt BoE members, like Fed members, are likely to tout successes bringing down inflation and their resolve to continue pushing it to target.

Should the vote or post-decision comments be perceived as dovish, traders may not wait for CPI data later in the month to crater GBP/USD.

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Synopsis:

Bank of America outlines its expectations for the upcoming Bank of England (BoE) meeting, predicting a steady approach with no change in the Bank Rate. The meeting is likely to signal a cautious shift towards rate cuts in the future, possibly beginning as early as June.

Key Points:

• Interest Rate Decision: The BoE is expected to maintain the current Bank Rate, with a majority of members favoring the status quo, but signs of dissent could emerge, hinting at future rate cuts.
• Monetary Policy Outlook: Current guidance stating that "monetary policy would need to be sufficiently restrictive for sufficiently long" is anticipated to persist, yet the minutes may show a gradual shift towards easing.
• Inflation and Economic Forecasts: Updated forecasts might show inflation trending slightly below target by 2026, which could justify upcoming rate reductions. 
• GBP Sensitivity to Rate Decisions: The British pound's performance remains closely tied to rate differentials and central bank actions. Current market pricing suggests a nearly 50% chance of a June rate cut, which could significantly influence GBP movements.

Conclusion:

The outcome of the BoE's meeting is poised to play a crucial role in GBP dynamics. With the market pricing in almost a 50% chance of a rate cut in June, any dovish signals from the BoE could significantly impact GBP valuation

• EUR/USD flat, low vol backdrop prompts narrow range (1.0735-57)

• 200-DMA (1.0795) remains a stumbling block. Break would entice bulls

• Abundance of EUR/USD option expiries around 1.0750 may have a pinning effect

• Thus, the pair may continue to trade close to current levels

• Slew of Fed speakers (Jefferson, Collins, Cook) unlikely to move the needle

• Narrative vacuum until U.S. CPI (May 15) can see tight ranges hold

• EUR/USD also fairly valued relative to EZ/US yield spreads

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