In the FX review this week we focus on the impact of Boris Johnson resigning on GBP, along with strong NFP’s on Friday for the USD.
Bye Bye Boris
The main news event from this week was the resignation of PM Boris Johnson. Although the writing had been on the wall for some time, it did still come as a surprise to the markets. We wrote in a QuickPick our immediate thoughts earlier in the week.
For GBP the initial move was higher, but this has stalled as we closed out the week. The main premise we see is that a clean reset at the top is good for the UK in general. Add into the mix a new Chancellor and a new fiscal direction (potentially), and it certainly provides a catalyst for the pound that it so desperately needs.
We think that a short-term rally could be seen from here. We express this by going long GBPUSD @1.2000 in our portfolio. Even though this goes against our longer-term view of USD strength, we think tactically there should be more movement in this pair than other alternatives. Given the rich valuation of the greenback, a pullback over the next week or so does make sense.
Looking months down the line, we still think that the monetary policy actions from the Bank of England will dictate the direction for GBP, with politics taking a more usual sideline approach.
NFP’s big, 75bps rate hike done
On Friday we got the latest NFP reading for the US, which beat expectations at 268k to come in at 372k. The participation rate and average hourly earnings were broadly as expected, so the result was a modest USD bid.
We think this all but cements a 75bps hike from the US Fed at the next meeting. It would be hard for the central bank to walk back on the market, especially following the move to go for 75bps at the last meeting.
However, the market is already very long USD and so although we are bullish the greenback longer term, we struggle to see a material upward move over the next few weeks.
Trade ideas from here
For those uncertain on USD direction, we also like expressing long GBP by being short CHF, which we think has become overvalued in recent weeks. The surprise hike by the SNB is noted, but we don’t see any major reasons why this move should have the legs to continue.