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In our FX review this week we talk through why the US Dollar is continuing to grind higher despite looking overbought, along with why falling GDP figures make it more bearish on GBP.

DXY Hits 105

Last week, the DXY continued to grind higher, albeit at a slower pace than preceding weeks. The index touched 105 briefly towards the end of the week, new multi year highs.

We didn’t get out any material new information out from the Fed last week, but we did get new data. This was in the form of US inflation for April. It was slightly lower than the previous reading (8.3% vs 8.5%), but it was still above expectations. From this we can glean that inflation might be starting to peak in the states, but it might not retrace lower at anytime soon.

This naturally helped to keep the USD well bid, with investors thinking that the Fed are going to have to stick to their guns and hike aggressively over the summer. This is our base case scenario as well. So while we don’t see any real USD weakness in the mid term, we feel the market has priced this in already, so also struggle to see meaningful USD strength either.

How we would play USD crosses at the moment is as follows. In the very short term, we could see profit taking, so USD could see a temporary move lower. We’d pair this up with alternative currencies that we like, primarily CAD and CHF. In fact, our trade of the week from last week was short USDCAD at 1.3000.

Underperformance for GBP and EUR

With the USD plodding along, any underperformance from other currencies was firmly felt. For example, GBPUSD and EURUSD both continued to slump to fresh lows last week.

In the UK, the March GDP reading showed a fall of -0.1%. When we think of the Bank of England forecasts looking for a negative GDP quarter in Q4 this year, it doesn’t bode well for GBP. Even when we pair up GBP against a beaten down EUR, EUR outperforms. EURGBP jumped easily above 0.8500 last week, a real reversal from the 0.8200 levels only a couple of months ago.

We’re starting to turn bearish on GBP, and struggle to see it doing well anytime soon. However, given our view on USD, we could see a bounce in GBPUSD in a relief rally towards the 1.2500 area before moving lower again. Yet fundamentally, we don’t mind many reasons to be positive on GBP, or even EUR for that matter.

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