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In our FX review this week, we talk through the USD rip into the long weekend and look at the implications of the host of top tier data that was released last week.

Key levels traded on USD pairs

Last week was a shorter one for many, with the Easter weekend seeing London and New York out on Friday. As a result, Thursday afternoon was always going to be interesting as liquidity fades and risk gets cut for many not wanting to hold positions over the long weekend.

What this led to was a strong USD bid, with notable moves in key pairs. We noted the break to fresh lows on EUR/USD which traded down to 1.0758. USD/JPY also powered higher, easily closing above 126. AUD and NZD both pulled back as well, with GBP/USD the only pair that offered much resilience.

In fact, the lack of a break and daily close below 1.3000 on GBP/USD leads us to be bullish on the pair while this level holds. It’s our opinion that the Bank of England will hike again shortly, and so feel the interest rate differential will support the pair given that the base rate will likely be at 1%.

This counters to something like EUR, that saw a rather neutral ECB meeting on Thursday. There doesn’t look to be any move in monetary policy coming, even when the asset purchases finish in Q3. Therefore, that’s why EUR/USD was one of the worst performers as we closed out the week.

UK and US inflation beats

Last week we also got a host of data out from countries that needed to be digested. For GBP, industrial production beat expectations, with the unemployment rate also falling lower down to 3.8%.

However, CPI inflation rocketed up to 7%, much higher than expectations at 6.7% and the previous month reading. We feel this puts the BoE in a tough spot later this year when it has to decide whether to push on with rate hikes into the autumn to stem inflation, even when the UK economy might not be ready to have base rates at circa 2% so soon.

For the US, retail sales on Thursday missed expectations, although the market didn’t pay too much attention to this. The inflation print also saw it beat expectations, coming in at 8.5% versus 8.4% expected. There’s a real chance that the US sees double digit inflation year-on-year in coming months, elevated by higher energy costs.

Ideas for next week

Monday is also a bank holiday for most of Europe, so expect a lack of real movement until London walks in on Tuesday.

We are watching to see if this USD move reverses. If we see signs that it is, then we’d like to get long AUDUSD, and potentially add to our long GBPUSD existing position.

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