Softer USD Underpins GBP/USD

Back-to-back weekly gains for GBP/USD as the shockingly soft (vs expectations) Services PMI release had been countered by UK Chancellor Sunak’s support package for the cost of living squeeze. While the continuation of a pullback in the USD had also played a large part in underpinning the pair, as opposed to Sterling strength, given that EUR/GBP continues to oscillate around the 0.8500 handle.

That being said, while the USD has taken quite a hit from the hint made by Fed’s Bostic that the Fed could pause come September, this is very much data-dependent. As its stands, inflation remains sticky and thus the Fed will maintain its very hawkish stance. At the same time, I do believe a wash-out in positioning has had an impact on recent price action, not just the USD but equities as well, in which the latter has seen inflows for the first time in seven weeks.

EUR/GBP Looks to EU Inflation

For now, my bias remains to fade rallies in equities and re-engage with USD longs on dips. However, next week will be a holiday-thinned week given the Queen’s Platinum Jubilee and thus with volumes lighter, choppy conditions are likely to persist. Meanwhile, there will be key German and Euro Area inflation prints next week, which will be something to watch for EUR/GBP. I still like EUR/GBP higher as long as the cross continues to close above the 200DMA (0.8443), while 2Y spreads also remain supportive.

EUR/GBP vs 2Y Spreads

Source: Refinitiv

EUR/GBP Chart: Daily Time Frame

Source: Refinitiv