1. The BoE are conservative
Both growth and inflation were revised higher in last weeks BoE meeting. However, the BoE policy decision was an abundance of caution. Eventually, the BoE is going to acknowledge a better picture, and that should lift the GBP. The last three meetings have been what I call ‘bullish under the hood’.
2. Yield differentials support the GBP
The two-year bond yield and the 10-year bond yield have both jumped significantly since January this year.
The 2-year yields have increased by 27 bps from Jan 04-June 22.
The 10-year yield has jumped by 61 bps.
This has led to the GBP gaining around 2.8% against the USD.
3. Pair with the CHF, SEK or EUR, not the USD
The CHF is likely to find weakness going forward as the SNB remains firmly on hold and does not want to do anything to add to the strength of the already ‘highly valued franc’. The EUR is another option, but the strong German data last week gives reason to pause. The SEK is a more exotic choice with Swedish political uncertainty likely to grow. The risks with a GBPCHF long is that risk-off markets will support the CHF. However, if risk-on trading remains then GBPCHF should find buyers above the key trend line marked below.
The USD is one to probably avoid at the moment with uncertainty surrounding the Fed’s next move. However, stay on top of the narrative from the Fed to consider a GBPUSD long. The recovery of the UK economy and the fast UK vaccination programme should start to benefit the GBP soon, despite a very conservative BoE.