The recent pullback in the US dollar resulting from eroding odds of a summer Fed hike has been reflected in speculative traders’ positioning in the futures market. We focus on emerging developments in GBP/USD and USDCAD positioning. Net positioning of GBP shorts vs. USD fell to 29,281 contracts last week (from 36,045), the least negative in more than seven weeks, while net shorts in CAD vs. USD fell to an 11-week low of 27,051 contracts (from 30,578).
Last week’s release of the minutes from the Bank of England’s April MPC meeting revealed that two members stated the vote to hold rates unchanged was a “finely balanced” decision. The minutes implied that interest rate expectations had shifted towards an earlier than anticipated tightening, in contrast to the Fed, which is increasingly expected to not raise rates this summer as was anticipated less than four weeks ago by most participants.
Is Labour victory priced in?
Another argument seen in favour of GBP is that the downside risks for GBP associated with a Labour-SNP coalition (fiscal tightening for businesses and the wealthy & likelihood of undershooting budget targets) and those from Conservatives (pushing for referendum on UK’s EU status) have been widely discussed among traders to the extent that they may no longer cast such a negative spell on the market and the pound.
We do not rule out the possibility that the most GBP-positive scenario for GBP remains possibility, which would be a Conservative-led minority government, formed by Conservatives, Liberal Democrats and Democratic Unionists Party accumulating about 305-315 seats, insufficient to attain the 326-seat majority but would bring Tories ahead of Labour by 5 to 8 seat margin. This would combine the benefits of incumbent and market-friendly party victory, while eliminating the risk of EU referendum due to LibDem opposition to any Referendum bill.
Loonie speculative bullishness
The Canadian dollar was lifted by a combination of larger than expected Q2 growth upgrades from the Bank of Canada, prolonged gains in oil and increased chances that the BoC will remain on hold into the rest of the year. Adding the potential for this week’s FOMC decision (shutting the door for a Q2 rate hike) and advanced US Q2 GDP seen weakening to as low as 0.5% from 2.2%, FX speculators face more USD downside from a risk-reward ratio.
With the help of oil, USDCAD may end uo retesting 1.1800 and GBPUSD is at more superior technical levels to retest 1.5650 than it was in February.
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