FX Analysis – USD halts decline, GBP downside risks ahead

The recent USD decline stalled in yesterday’s session  with FX traders seemingly taking the view that there is not enough thrust from US data to justify a significantly weaker USD just yet. Aside from the inflation aspect – and markets may have reacted a bit too optimistically to the CPI and PPI – jobless claims also eased back yesterday to 222k after a jump to 232k one week ago, mirroring the January reading where they reached 225k but then dropped back to the 200-210k area.

GBP under pressure

EURGBP has come off its 0.8610 peak in the past couple of sessions with a strong equity market benefitting the more cyclical and risk sensitive Pound Sterling. At the same time, volatility in the pair seems to be abating ahead of the key CPI figures in the UK next week.

Risks are skewed to the dovish side for the Bank of England, and a move higher in EURGBP is a good chance as traders increase their bets on a June rate cut.

Today, the key event for GBP traders is a speech by the BoE’s Catherine Mann, who is considered the MPC’s most hawkish member. Yesterday, Megan Greene echoed the recent cautious optimism on inflation expressed by Governor Andrew Bailey at the latest meeting.