Pound Enters Make-or-Break Mode as Key Technical Levels Tested

  • Euro orbits $1.12 handle as FOMC begins two-day meeting
  • Swedish krona leads gains over dollar on faster inflation

UBS' Smiles Is Underweight U.K. Equities

As dust from the U.K. elections started to settle, the pound found support from model accounts as the lows seen on the immediate aftermath of the vote have yet to be breached.

Sterling has once again rebounded after visiting $1.2630-40 area, forming a triple bottom on the daily charts. Real-money names were also seen on the bid, according to Europe-based traders. Given these accounts have a long-term horizon in mind and tend to stay sidelined amid political woes, this demand could represent squaring of shorts. CFTC positioning shows that for the week ended June 6, pound shorts among asset managers and institutional investors were close to their lowest levels since October 2015.

Data showed that U.K. annual inflation rose more than forecast in May to a four-year high and cable initially nosedived by 30 pips to $1.2687 as higher consumer prices amid subdued wage pressures are seen as a drag on the economy. Yet, the move was short-lived as political developments and Brexit negotiations matter more for now.

A similar technical development was seen in euro-sterling as the pair failed to meaningfully rise above the 50 percent retreat of its drop since the October flash crash. A daily close above 0.8860 could open the way for the shared currency to revisit its November highs above 0.9000. Demand has risen this week for upside exposure through vanilla calls and topside reverse knock-out structures, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

Given investors prefer to trade any pound weakness via the euro, as the dollar may face headwinds from political stability as well, the cost of hedging price swings in euro-pound may soon eclipse that on cable.

  • The euro slipped initially versus the greenback and model accounts were looking for a potential close below the 21-DMA, currently at 1.1204
    • Amid average-sized volumes, it rose to 1.1225 day high, looking for direction from the Fed decision due Wednesday
    • The dollar was lower versus all G-10 peers except the yen and down by 0.1 percent as measured by the Bloomberg Dollar Spot Index as of 10:14 a.m. London time
    • USD/JPY gained as much as 0.3% to 110.27
  • The main outperformer was Sweden’s krona as inflation slowed less than estimated last month; Riksbank is seen now less likely to add further stimulus, even if that means achieving desired inflation levels may take longer than anticipated
    • SEK erased nearly four days of losses as it gained as much as 0.9%
  • Canadian dollar volatility outperformed in a generally quiet market as BOC’s Wilkins hawkish comments spurred fresh demand for the loonie in both cash and options markets
    • USD/CAD was lower a fourth day, on its longest losing streak in two months; it slipped by 0.5% Tuesday to 1.3256, lowest since April 13
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