Where we are: GBP/USD is currently trading at 1.3533, up 0.49% on the session and testing the upper end of its daily range (1.3454-1.3534). Cable has shrugged off earlier weakness and is now above yesterday’s approximate NY close, driven by a weaker dollar and shifting rate expectations. The pair is bumping against resistance around the 1.3535 level, a break of which would open a test of the 1.3550 area.
What’s driving it: The primary driver is cautious optimism surrounding potential US-Iran peace negotiations, as reported in the wire, leading to a broad risk-on sentiment and weaker USD. DXY is currently at 98.36, down 0.31% on the day. Additionally, rising UK inflation expectations are reinforcing bets on future Bank of England rate hikes. The US-UK 10Y yield spread is currently -61bp, which supports further upside for Cable if the move persists.
- The UK businesses now expect CPI inflation to hit 4% in the year ahead, according to the Bank of England’s Decision Maker Panel, stoking BoE hike bets.
- DXY is under pressure at 98.36, following through after the breach of 98.50 in early Europe.
- Speculative positioning remains moderately short GBP, at -52,039 contracts, which leaves room for a squeeze if the bullish momentum continues.
NY session focus: The main event risk for the NY session is President Trump speaking at 17:00 London time, and any remarks regarding Iran will likely cause volatility. We expect continued focus on yields, with the US 10Y currently at 4.302% and the 2Y at 3.785%. Watch for a sustained break above 1.3535, targeting 1.3580 initially, with stops below 1.3500. The working trade is long GBP/USD on dips. The crowded trade at risk is short GBP against the EUR, which is looking heavy. The pain trade is Cable pushing through 1.3600 and triggering a significant short squeeze.