Sterling Targets $1.27 Vs Dollar and Holds €1.18 Handle Vs Euro

GBP: Sterling rates look priced too close to the US

Looking at forward curves, it is remarkable that UK interest rates remain priced so close to the US. Both price around 45bp of rate cuts this year and both have a terminal rate for forthcoming easing cycles around the 3.30/3.40% area. According to ING Bank, their view this summer is that UK rates will be repriced lower starting with a rate cut in August. And this should lead to a lower Pound. We will not hear anything more from the Bank of England until after the 4 July general election now. But thereafter, ING Bank will be looking for the more dovish members of the seven who voted for unchanged rates last week to make their voices heard.

GBP/USD gained traction and advanced to $1.2700 on Monday. Early Tuesday, the pair stays in a consolidation phase near $1.2690. Against the single currency, GBP/EUR continues to hold the €1.18 handle, with the Euro under pressure ahead of French Elections. 

No Major Data

EUR: National Rally says the right things

German yield spreads have narrowed a little and the Euro has edged up after representatives of France's National Rally (RN) party have said the party will respect the nation's budget rules. However, the plan to cut EUR7bn in taxes still seems to exist – partially funded by slashing France's contribution to the EU budget.

The Euro may struggle to sustain a rally over the coming weeks and that key Euro cross rates, such as EUR/AUD and EUR/NOK, will come lower. These moves should accelerate should US inflation indeed come in on the low side. EUR/USD may therefore struggle to break to the topside of its 1.0660-1.0760 range. Against Sterling, the single currency looks set to struggle as well.

No major data

USD: Action is elsewhere until Friday

The Dollar continues to lack a significant trend and remains to the topside of a two-month trading range. US interest rate volatility remains subdued and that means interest has resumed in the yen-funded carry trade. USD/JPY continues to hover just below 160 as the Yen softens again, while some of the big beasts hit hard on the recent carry trade unwind – e.g., the Mexican peso – continue to recover. It seems that there is not quite enough bad news to justify short positions in expensive currencies like the Mexican peso. Additionally, the low volatility environment makes it more difficult for Japanese authorities to intervene at 160. According to ING Bank, they suspect they had been hoping for the US rates cycle to turn lower by now and be the key driver of a lower USD/JPY.

Instead, the Dollar remains sidelined ahead of two key event risks later this week. Thursday night sees the first presidential debate between President Biden and Donald Trump on CNN. It may be too early to expect this, but ING Bank will want to see whether the Dollar responds to who 'wins' the debate. A positive outcome for Trump could see the Dollar edge higher. But the bigger market mover this week will be Friday's core PCE inflation read. Should it meet expectations of a 0.1% month-on-month reading, the short-end of the US curve can come lower and take the Dollar with it. However, most of any Dollar downside will be felt against the likes of the Australian dollar and the Norwegian krone, rather than against the Euro.

Data 15.00: CB Consumer Confidence expected 100 from 102.