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USD struggles to extent rally
USD dead cat bounce
The US dollar reversed losses yesterday amid heightening geopolitical tensions in the Middle East. Indeed, after the Syrian situation and the Iran nuclear deal, now we got the Gaza killings following the official opening of the US embassy in Jerusalem. After falling as low as 92.24 Monday afternoon, the dollar index surged 0.60% to 92.80. The rise of the index was mostly driven by the debasement of the Japanese yen (-0.50%), the Canadian dollar (-0.20%) and the euro (-0.18%).
However, it seems the rally is overstretched as buyers are shying away. April’s retail sales are due for release today with the headline gauge expected to ease to 0.3%m/m from 0.6% in March. However, when excluding auto sales, the measure should have accelerate with median forecast of 0.5%m/m compared to 0.2% in the previous month. We think that the risk is mostly on the downside for the greenback today as a disappointing read could re-fuel worries about the US growth outlook.
Overall, we maintain our bearish view on the buck as we estimate that the recent dollar appreciation is widely overdone.
GBP overly bearish
Sterling has been dragged down by the changing BoE rhetoric and repricing of the timing tightening cycle. Since February weak economic data ended the all-but-sure May rate hike. Yet, expectations of monetary policy strategy has become worryingly short sighted, data dependent in our view. Today mixed labor market data, growth rising 2.9% weekly earning x-bonus yet softer 2.6% average weekly earnings will spark debate. Data indicate only now responding to soft patch. Give the sharp decline in sterling we suspect that positive news will have a larger effect on pricing then negative reads. In addition, evidence of inflation will more likely trigger expectations of higher interest rates then sluggish growth. A widely expected at recent policy meeting, the MPC left the Bank Rate unchanged at 0.5% with Committee voting 7-2.
The BoE has acknowledged the recent weakness (which is consistent with broader global slowdown) in growth and inflation data (waning FX impact) but the door remains open for August hike. We understand the MPC comment is that express concern over the strength of the economy and see the bar for future rate hikes as high. However, dovishness is overpriced. As marginal recovery, bounce takes place markets will quickly reload on GBP long (German ZEW current situation rose to 87.4). In the longer term, much depends on Brexit and direction of free trade negotiations. Our based scenario is for EU-UK friendly outcome. We are positioned for a positive swing in oversold GBP on either good news on Brexit or pickup in domestic data.