In our FX review this week, we focus on the shortened trading week in the UK due to the bank holidays. We also look at the key ECB meeting on Thursday, as well as US inflation data on Friday.

In your absence

the short trading week in the UK meant that there was lower volatility at the back end of the week, but a rush of flows at the beginning. This also tied in with month end, so many pairs were jumpy without any real direction on bias. This is usually the case in the month end period, where transactional flow tends to take over for large corporates and rebalancing for asset managers.

It does appear that the USD bull run is stalling, evident from the fact that EURUSD and GBPUSD managed to hold ground and close at good levels. There were still some losers against the greenback, notably JPY, which traded back above 130 with little indication that a reversal is due. The other safe haven, CHF, held ground much better, leaving us to conclude that the JPY weakness is currency specific.

The only other notable point from the end of last week was the Non-Farm Payrolls figure on Friday. The headline number of 390k vs 325k expected was solid, but the unemployment rate moved slightly higher to 3.6% which kept a lid on any potential USD strength.

ECB meeting is key

What we think investors were already starting to think about last week was the upcoming ECB meeting on Thursday. In recent weeks there has been a repricing of expectations that the central bank could normalize monetary policy by the end of Q3. This would effectively mean interest rate hikes, probably to take the deposit rate back to zero.

As a reminder, the negative interest rates in place have been one pillar that has caused EUR to struggle in the recent past. If I can sell EUR for a negative carry and buy USD that pays me 1%, then why not?

If the ECB intimate that this could change in coming months, then EUR could start to be back in vogue. We don’t see if back at 1.15 vs USD anytime soon, but it could definitely test 1.10 and put the USD bull run into question.

Aside from this, USD inflation on Friday will be closely watched. Expectations are for a May figure of 8.2%, slightly off the 8.3% from last month but still very elevated.

Trades we like

At the moment, we like to be tactically short GBPUSD, given the lack of good news out from the UK. We’ll also be looking to enter a EUR trade (most likely EURCHF) to make a play on the ECB later in the week.

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