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Forex Flash: Scope for GBP/USD recovery in short-term – UBS

FXstreet.com (Barcelona) - According to Research Analyst Gareth Berry at UBS, “GBP/USD positioning in particular may have gone a bit too far in the short-term so there is scope for some recovery, but it does open the way for some more structural policy factors to be priced in.” The key point being that FX markets have always traded through pricing in policy differentials: be it through interest rate differentials or the pace of QE.

When the rules of the game for policy change, the reaction function must adapt accordingly. The new structural seems to be the distance between discrete points on the policy path for forward guidance, or relative distance towards full achievement of the thresholds and the 'work' needed to reach the destinations - akin to travelling up an uphill slope while trying to use policy to make the engine more powerful.

For the sterling, though, some silver linings can be found in looking at the Fed's path and the dollar's response. Irrespective of what happens in Europe, we may look back and call Q3 2012 the absolute low in policy execution, but also the point where no further downside was possible. Most of the structural impediments of the economy, especially bank and household balance sheets, were resolved and the only direction was up. “If the UK has now reached this point, then central banks would want the strongest possible catalyst to generate momentum towards escape velocity, and that will be the new remit complemented by sterling trading at its cyclical trough. The next phase will only be higher, investors with UK longs will just need to bide their time.” Berry adds.

Forex: US Dollar Index flat below 83.00

The US Dollar Index, which tracks the greenback against its major rivals, is posting marginal losses on Thursday, trimming weekly gains from highs above 83.00...
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Forex Flash: 10-year US treasuries continue to trade sideways – RBS

The market continues to see a 1.75% to 2.15% trading range in 10-year US Treasuries Thursday. According to the RBS Research Team, “Key resistance remains 2.15% in 10-years, while near term support is at 1.83%. Our bias remains to modestly lower yields in the near-term, though confidence in our abilities to call even minor moves in this environment is ebbing as the dominant rate trend remains sideways.”
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