GBP/USD is eyeing 1.30 - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explain that GBP/USD has been holding just below the key psychological 1.30 level since the start of the month and technical indicators suggest that a break above would set cable on course for a potential move to just below 1.33, which monthly charts suggest is key trend-line resistance. 

Key Quotes

“A break above here would put resistance in the 1.34/35 area in view.  However, in order for the GBP/USD1.30 level to break, a trigger would have to appear.”

“Tomorrow, is livelier with key production and trade data followed by the Bank of England’s policy announcement and the publication of its Quarterly Inflation Report.  Despite the importance of the trade report, it is production data that tends to have the greater short-term market impact.   The March reports is expected to show a softening in the underlying rate of growth.  Although UK PMI data has remained strong, these surveys overstated growth in Q1; a trend which was also noticeable in other European countries.   Although the median for the Bloomberg survey comes in a -0.4% m/m for the production number, the spread of forecasts is large.”

“Some economists argue that the fact that the February weakness was on the back of low energy production due to unseasonably warm weather, a bounce is likely.  Stronger than expected production data tomorrow could provide fresh incentive for cable.  However, the market could remain reluctant to break the GBP/USD1.30 level ahead of the BoE policy announcement at midday tomorrow.”

“Our view, and that of the consensus, is that the MPC is likely to vote 7:1 in favour of steady rates this month with Forbes likely to repeat her call from the March 16 policy meeting in favour of an immediate tightening in policy.  Forbes’ view in March was based on the fact that UK inflation was rising quickly and was likely to remain above the Bank’s target rate for at least three years.  Not only had measures of domestically generated inflation increased notably ahead of the March policy meeting, but global reflation and minimal labour market slack were seen as upside risks to price pressures.”

“If Forbes is joined by another MPC member (there is some talk that Saunders could position himself as a hawk), GBP/USD would have a strong chance of testing the 1.30.  However, we rate the chance of Forbes withdrawing her dissent this month as higher than the chance that she will be joined by another member.”

“A strong victory for PM May on June 8 could provide further gains for sterling.  Also some timely compromises in early Brexit talk, perhaps over the rights of EU citizens, could send the pound higher.  That said, Brexit still holds many pitfalls for GBP, particularly on the issue of a trade deal.  By the end of the year, we expect GBP/USD to be trading in the 1.25 area.  Consequently we would be looking at any rally towards the 1.33 area as an opportunity to sell.”