In our FX review this week, we look at the impact of US data at the end of the week, as well as how GBP continues to recover. The week was much calmer than the previous week, as markets enjoyed much better risk sentiment.

US data won’t move the Fed

The main focus of the week came at the end of it. During the week, key FX pairs lacked direction. On Friday we had the release of Non-Farm Payrolls, with many looking to the figure for direction regarding the future monetary policy moves from the US Fed.

The number was a large disappointment, coming in at 194k versus 500k expected. We did see a USD sell-off in the immediate aftermath, but not as much as one would think. The saving grace on the overall report was the average hourly earnings. It came in at 4.6%, versus 4% on the previous month reading. WE also noted the unemployment rate dropped down to 4.8% from the previous figure of 5%.

On balance, the overall report isn’t a big mover either way. As such, we don’t think this changes the US Fed policy. Previous guidance suggests that the central bank will look to start tapering off asset purchases at the end of this year, and start raising rates next Autumn.

As the dollar trades on market expectations, yesterday didn’t meaningfully change this, so as we closed the week most USD crosses were back at lower levels. 

Still liking to be long GBP

One of the few pairs that managed to gain via the USD last week was GBP. GBPUSD traded above 1.3650, up two big figures from the lows seen last week. From a technical point of view, the pair has further upside to go before real resistance comes into play in the mid 1.37’s.

The short-term issues flagged last week around fuel shortages seems to be resolved. Rising energy prices are still a concern, but seems to have abated slightly. The UK is one of the largest energy importers, so higher prices means more GBP being sold to import. This is the main risk to our view of GBP appreciation heading into the end of the year.

We do still like being long GBPUSD, but an alternative lower risk trade would be getting long GBPCHF or GBPEUR. This takes out the volatility likely coming from the US Fed making a policy move soon. Further, if the global economy continues to recover then investors will likely reduce holdings in the CHF as a safe haven.

Looking ahead

Next week we get several data points out from China, including inflation and retail sales. These will be closely watched by all, to see whether fears of a China slowdown are well-founded or not. In the FX space, heightened concerns should see flows into USD, CHF and JPY. A lack of concern would benefit our GBPCHF and GBPUSD trades.

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