GBP Resilient Post-Brexit; USD Fragile Despite Rebound
- Rising prices in UK keeps BOE looking for a rate hike, preventing Sterling from slipping now that Brexit has been triggered.
The final trading day of the week, month, and quarter should bring about a wave of positioning rebalancing, for those that have yet to do so over the past few days. It seems a bit of rebalancing may have already taken place, with the Euro, for example, having given back much of its gains accumulated during the first three weeks of March. Similarly, the US Dollar, which had been especially weak since the March 15 FOMC meeting, has seen an acute rebound since Tuesday.
Yet as we turn the calendar into April, there are several overarching themes in play that will likely exert themselves over recent rebalancing price action. From a seasonality perspective, April has been the third-worst month of the year for the DXY Index over the past 20-years, while April has been one of the best months of the year for the British Pound (the best) and the Euro (the third-best).
For the British Pound, the resiliency shown since Article 50 was triggered may help diffuse fears of a hit to the UK economy. It is important to keep in mind what the BOE said at their March policy meeting, which was more or less that they're not going to tolerate an inflation overshoot. Recent price data out of the UK suggests inflation will run higher over the coming months, making more hawkish commentary - and even a rate hike - a very strong likelihood. Sprinkle in the large speculative short position futures traders have for the British Pound, and all of the sudden there are several factors lining up that could point to a short squeeze in April.
For the Euro, price action has been less-than-kind as rumors emerged that the ECB was not happy with the market's interpretation of their March policy meeting. Certainly, the weaker inflation data the past few days might have given the Governing Council a bit of breathing room to get the market to back away from the idea that the ECB is looking to taper in the near-term. Yet with the backdrop of generally improving economic data, should the French elections turn out benign, signs are pointing to a leg higher by the Euro across the board. While futures traders aren't carrying a significant short position at present time, it is very likely that a Marine Le Pen loss in the French presidential election (voting on April 23 and May 7) would cause a collective sigh of relief in FX markets in the form of a Euro rally.
In the near-term, looking ahead to next week, the early days of the new month will bring about the typical high volume of "high" rated event risk. The RBA policy meeting on Tuesday, the March FOMC minutes on Wednesday, and the March US Nonfarm Payrolls report on Friday will surely bring about more volatility.
--- Written by Christopher Vecchio, Senior Currency Strategist
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