Cable in focus ahead of inflation report

The main theme in the fx space was a US dollar recovery from Friday’s weakness.

US Dollar
Source: Bloomberg

It always seemed that USD weakness would be temporary, as some traders who were positioned for a much better than expected jobs reading took profits. However, with the profit taking out of the way, it remains clear just how strong a position the US economy is in now and just how far along data has come. With that in mind, traders were happy to buy the USD on dips and this saw risk currency pairs fall while USD/JPY bounced.

GBP/USD will be an interesting pair to watch this week with the BoE’s inflation report due out on Wednesday,  along with a speech by BoE Governor Mark Carney. The sterling has been under significant pressure recently, in a move that started when the Scottish referendum was building momentum. While the Scottish voted against independence, the sterling never quite recovered and traders continue to use strength as an opportunity to sell. Cable hit a low of $1.5790 last week and that is the level I’m looking out for to be tested in the near term. Analysts are expecting downward revisions to near term inflation projections, at a minimum. Conditions have been somewhat softer in the UK and this suggests the BoE could have to downgrade its hawkish tone as far as hiking is concerned. Key support comes in at $1.5722, which is the 61.8% retracement of the July 2013 to July 2014 rise.

GBP/USD
Click to enlarge

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