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Risk event for the week of 16 May: short GBP

With the potential for a better price to enter another short sterling trade, Daily FX's Richard Snow considers the levels to watch for GBP/USD ahead of UK inflation and jobs numbers.

(Video Transcript)

Risk Event

Let's take a look at a Risk Event for the week starting Monday the 16th of May.

And for this, we're off to Johannesburg to join Richard Snow from DailyFX. Richard, good to talk to you again. What have you got for us for this Risk Event coming up?

GBP

I figured it would be appropriate to talk about the pound, Cable, to be exact. That's in light of the two main pieces of data on hand next week, that being the unemployment data and, more crucially, the inflation data on Wednesday.

Unemployment data

Touching quickly on the unemployment data, the labour market has proven to be fairly robust. Even if we are to see a worse-than-expected number there, I do not believe it will have a significant bearing on the Bank of England's motivation to hike rates over the next few meetings. Unemployment is still quite strong there at 3.8%.

Rates

Now, speaking of rates, the May 5th Bank of England (BoE) meeting revealed some resistance to the previous forward guidance. That was as two members of the committee now see risks to growth and inflation as more balanced, so that more or less implies that their rates may not rise as high as initially thought and that's obviously bearish for the pound.

However, most members still agree that some degree of tightening is still appropriate in the coming months. So, the reluctance to hike certainly puts downward pressure on the pound over the coming months.

Focusing on Wednesday's inflation data, we could very well see a counter-intuitive market response if inflation surprises to the upside. And this is because high inflation worsens the current cost of living crisis, particularly at a time when there is some reluctance on the part of the Bank of England for sustained rate hikes.

Chart

So, just to sum up, a high inflation print in my view could indeed see more selling across Cable. So, looking at the chart, Cable currently hovers between $1.2250 and $1.22 flat, with $1.20 very much in sight.

So between now and Wednesday, a lot can happen and I wouldn't rule out a slight pullback towards $1.2250 before a concerted move towards $1.20 with a target slightly above that level, I'd say, somewhere around $1.2050, with a fairly accommodative stop at $1.24 just to cater for some volatility that may ensue around the Risk Event.

Okay, Rich, thanks very much indeed. Richard Snow with his view for next week and a Risk Event around sterling with the jobs and inflation data.


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