Three things
1. The BoE are conservative.
Both growth and inflation was revised higher in last weeks BoE meeting. However, the BoE policy decision was an abundance of caution. Eventually the BoE are going to acknowledge a better picture, and that should lift the GBP. The last three meetings have been what I call 'bullish under the hood'. A Ford fiesta shell, but a meatier engine out of sight. It's a bit like the rally version of the Toyota Yaris. Looks a sensible granny car, but shifts like lightning.
2.Yield differentials support the GBP
The two year bond yield and the 10 year bind yield have both jumped significantly since January this year.
The 2 year yields has increased by 27 bps from Jan 04-June 22
The 10 year yield has jumped by 61 bps.
This has led to the GBP gaining around 2.8% against the USD.
3. Pair with the CHF, SEK or EUR, not the USD
The CHF is likely to find weakness going forward as the SNB remains firmly on hold and does not want to do anything to add to the strength of the already 'highly valued franc'. The EUR is another option, but the strong German data lats week gives reason to pause. The SEK is a more exotic choice with Swedish political uncertainty likely to grow. The risks with a GBPCHF long is that risk off markets will support the CHF. However, if risk on trading remains then GBPCHF should find buyers above the key trend line marked below.
The USD is one to probably avoid at the moment with uncertainty surrounding the Fed's next move. However, stay on top of the narrative from the Fed to consider a GBPUSD long. The recovery of the UK economy and the fast UK vaccination programme should start to benefit the GBP soon, despite a very conservative BoE.
