RBC Recommend Short GBP/USD As Trade Of The Week

RBC believe that “relative pricing for the UK/U.S. forward curve looks implausible (UK Bank Rate nearly 50bps above Fed funds by year-end) and receiving GBP rates, paying U.S. has been a popular position, but we don’t think that extends to spot FX.”

• “In the past two months, our positioning monitor shows the market flipping from short GBP/USD and long EUR/GBP to long GBP/USD and more recently small net short EUR/GBP.”
• “Heading into this week’s U.S. CPI & BoE meeting, we see value in a tactical short GBP/USD trade.”
• “On the U.S. side, the risks around CPI look asymmetric. There is just +1bp in the curve for June and -72bps of cuts for H2. The reaction to a 0.5% m/m increase in core should be bigger than a 0.1% miss.
• “The BoE is widely expected to hike by 25bps and stay hawkish but the hurdle is high to out-hawk the forward curve (+67bps by September, on hold in Q4, minimal cuts in H124).”
• Thus, they recommended opening a short GBP/USD position as their “trade of the week.” This position was recommended with sport trading at $1.2604, with a target set at $1.2350 and a stop of $1.2720.