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Daily Observations: Checking in on GBP-crosses, USD-pairs

Daily Observations: Checking in on GBP-crosses, USD-pairs

Christopher Vecchio, CFA, Senior Strategist

In our last update, we discussed the potential for GBPCAD and GBPNZD to continue to build on their recent gains. While a soft bullish outcome has developed, there still be more gains ahead: monetary policy focus has shifted back to the hawkish outcomes around the globe, including the potential for BoE action closer to the start of 2016; and shifts in interest rate differentials have deteriorated the appeal of carry trade opportunities. GBPCAD and GBPNZD both fit this profile for longer-term appreciation.

While the hooplah around the GBP-crosses has notably cooled since the immediate post-election fervor, attention in recent weeks has been justifiably concentrated on the ongoing US Dollar rebound. As traders temper their dovish expectations for the Federal Reserve, the rally may only be getting started. The market remains fairly bearish on the prospect of a rate hike in 2015: the fed funds contract implied probability continues to suggest the first move from the Fed coming in January 2016. Similarly, Q2'15 GDP models - most notably, the Atlanta Fed's GDPNow - are still showing sub-1% growth in the quarter.

As US economic data continues to improve, there is substantial breathing room for the US Dollar to gain as traders reduce their bearish bets and instead take up trades based on rate hike expectations being dragged forward. While pairs with narrow interest rate differentials have been the first to move - notably USDCAD and USDJPY. The prospect of an ongoing USDJPY rally is enhanced by the slack in positioning: traders are the least short the Japanese Yen since Q4'12.

Read more: Trade Setups in USD-pairs Around Q1’15 GDP Revision

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