This weekend’s G7 summit in Italy saw German Chancellor Angela Merkel deliver the stark message that reliable relationships developed since World War II “are to some extent over”. She was specifically referring to the post-Trump US stance on international relations and trade.


The latter is something that worries ECB President Draghi too. In a recent speech, he explicitly stated his “concern” over the protectionist attitude of the US. Of more importance to the market, however, was his suggestion that, despite the encouraging uptick in European data, the region still required “extraordinary” stimulus. This reduces the prospect of a shift in forward guidance at the upcoming ECB meeting and the market has reacted accordingly, selling EUR.

Today, focus will be on European (German and Spanish) inflation and economic confidence surveys. We expect German headline HICP inflation to drop back to 1.5%y/y in May from 2.0% in April. This would suggest that it is too early to declare inflation is sustainable at the ECB’s target without ongoing stimulus. We expect Eurozone economic sentiment to improve to 110.1, which would be a near decade high. In the US, attention will be on the personal income and spending report. We look for a 0.4% rise in spending which should support expectations of a recovery in overall GDP growth in Q2. We also anticipate further moderation in both the headline and core PCE deflators to 1.7%y/y and 1.5%y/y, respectively.

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Domestically, releases in the early hours of Wednesday, which include GfK consumer confidence, Lloyds Business Barometer and BRC shop price index will provide an insight as to how well the UK consumer and business sentiment are holding up, guiding on whether GDP growth will rebound in Q2 following the soft 0.2%q/q outturn in Q1.

What comes next on GBPUSD? 

The break though channel support extended beyond 1.2830 to the well-watched 1.2770/50 area. We have bounced from the lows, but rallies have been shallow. Momentum studies are still bearish and, while below 1.2915/65, we look for supports to give way and the move to continue towards 1.25. A move back through resistance would suggest a false break and put us back into the range around 1.30.

A break up through resistance in the 1.3050-1.3080 region would call our current bearish view into question and risk an expansion of the move towards the 1.3500 region. This would not change our underlying medium-term outlook of a range, but rather than being between ~1.20 and ~1.30, we may be moving into a slightly higher range of ~1.25 to ~1.35.

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