Short GBP/USD Stopped Out At 1.54

• Our short GBP/USD position has been hit by weak US data
• We still believe that GBP/USD will fall up to UK election
• We expect US data to improve and still call for a Fed hike in Q3

GBP/USD higher on weak US data
On 20 April we recommended selling GBP/USD ahead of the UK general election on 7 May. We had discovered that since the April 1997 election, GBP has weakened against USD in the last two weeks up to election day, possibly reflecting an increased risk premium being priced into GBP as the elections have approached. Given the high uncertainty about the outcome, we still think it fair to expect an increased risk premium to weigh on GBP prior to the election. However, while we still expect the market to price in a risk premium ahead of 7 May, we have been wrong-footed by the recent USD sell-off. Over the past week GBP/USD has increased c2.5%, broadly in line with EUR/USD, emphasizing that we have recently witnessed a USD decline.

US data has continued to disappoint
We have been calling for a reversal of the series of negative US data surprises, which has however so far failed to materialise. At the same time, the USD sell-off demonstrates that the market clearly does not buy into our relatively upbeat view on the US economy, which we still expect to recover substantially in the coming quarters. Hence, rate hike expectations have recently been scaled back another couple of months since the beginning of April, with the first 25bp rate hike now priced for Dec 2015. We stick to our view that US data will recover in the coming months. In particular, we look for a rebound in private consumption, which has been the biggest disappointment in Q1 given the decline in gasoline prices. Tonight’s FOMC meeting could very well prove to be a turning point in market sentiment. We expect the statement to acknowledge the weakness in recent data but still expect a rate hike later in 2015. Hence, fundamentally, we still expect GBP/USD to trade lower driven by relative rates as we expect short-term US interest rates to increase more than equivalent UK rates. However, we stick to our initial strategy and comply with our stop loss at 1.54, while we still hold on to our short EUR/USD, entry 1.0750, target 1.0050, stop loss 1.1100.