The USD and GBP have been at opposite ends in the past few weeks as the Dollar reached new cycle highs and an index of the GBP falling to Feb 2021 levels last week. However, there might be some scope for a short-term mean reversion move higher this week.
Apart from the obvious pre-positioning for the two currencies, both central banks are close to a ‘peak hawkishness’ scenario right now, and given the downside seen in Sterling already, if that’s the case the Dollar could be ready for some catch up lower.
There are reasons for continued Dollar strength though such as:
[1] safe haven flows from geopolitics;
[2] a more hawkish than expected Fed (markets expecting a more aggressive path for the Fed compared to most peers);
[3] and there is the cyclical side where the USD’s inverse correlation to the global economy has been supportive as well.
Even though a 25bsp hike is fully priced for both banks this week, pre-positioning suggests that a less hawkish than expected Fed or less dovish than expected BoE could see some decent short-term GBP upside.
To be clear, we are not calling for a dovish Fed or a hawkish BoE, simply looking at a very high bar for the banks to cause a continuation of the current trends.
As always, we have more on this and how we look to potentially take advantage of it in our week ahead video.
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