Goldman with the note.
The tactical backdrop looks increasingly friendly for risk and negative for the Dollar with further signs of a benign slowdown in US growth, gradual disinflation (reinforced by the June CPI report this week), and a relatively light data calendar ahead.
In our view, this sets up for additional downside pressure on yields and upside in equities, at least until mega-cap tech earnings begin.
In such a backdrop, currencies that are “high-beta” (or positively correlated with risk sentiment) and rates-sensitive tend to do best, and in G10 Sterling typically tops the list.
As a result, we recently initiated a trade recommendation to go long GBP/USD over the next two weeks with a target of 1.30 and a stop of 1.2775.
Since then, domestic developments have also been favorable for GBP on the margin, with stronger-than-expected May GDP growth and a greater-than-anticipated focus on inflation persistence in BoE Chief Economist Pill’s latest comments (though we have been flagging that the broader macro, rather than BoE policy, should be the bigger driver of the currency and why we would anticipate a fade of any downside surprise in UKCPI next week).
Given we still expect a pro-risk backdrop to persist until late-July, we are sticking with long GBP/USD and raising our target to 1.31 as well as our stop to 1.29.
Being long GBP on crosses over a longer horizon also looks attractive to us, particularly against other “risky” currencies as the key contenders have additional betas that we think leave them relatively more vulnerable.
For instance, AUD relies on China sentiment, which as we have seen this year can dominate the currency’s beta to US equities, and the latest China data have been softer.
Meanwhile, CAD exhibits a positive beta to USD, meaning that any broad Dollar sell-off typically includes more limited CAD gains.
Finally, SEK’s larger beta to EUR and European risk leaves GBP relatively more insulated (though it’s sensitivity to US rates has left it better supported).
While EUR and AUD would be among our favorite funders over the next few months, USD funding still makes sense to us in the very-near-term—despite no change in our broader view that the Dollar should see renewed strength going into the US election.
Makes sense to me.
