Summary:

  • Markets reaction to US inflation report was rather restrained, which came as a big surprise and has medium-term implications for USD;
  • The basis of bearish pressure in GBPUSD is largely lockdown-related risks, the chances of which are falling.

Despite highly upbeat reading of US March CPI, markets’ reaction to the event was quite unusual – long-dated Treasury yields skid, pulling lower disappointed dollar. This suggests that the prospects for inflation and growth are largely factored into valuations - the market has gone far ahead in its inflation outlook and will be difficult to surprise. At the same time, the number of arguments against buying the dollar is growing - the net position of speculators in futures has approached neutral (net short is only 2% of open interest), which reduces the opportunity for short-squeeze, the Fed is resolutely rejecting speculations about tapering of asset purchases, and on the other side of the Atlantic, economic activity is reviving, making growth more synchronous, which takes the advantage off the USD.

EURUSD continued to rise, thereby completing the "flag" pattern (one of the trend continuation patterns). However, now the pair is in the area of overlap of the upper bound of the downward trend channel and key horizontal level. The previous attempt to break out and go beyond the upper border of the corridor in a similar situation ended unsuccessfully, and sellers retained control. Successful consolidation above the level of 1.1950 may be considered as a signal that the pair is returning to a medium-term uptrend:

The pound sterling came under pressure yesterday after news that the chief economist of the Central Bank is leaving his post. Andrew Haldane was one of the main hawks in the Central Bank of England, so the path to raising rates may be longer, due to decline in the general policy bias of the Central Bank to quickly normalize credit conditions. However, the main focus remains on the pace of vaccination and the UK is doing well in this. Among the latest news, England's superiority in this regard is notable - take, for example, the fact that more than half of the adults in the country received the vaccine. In the GBPUSD pair, after the correction from 1.40, many risks related to the last lockdown remain priced in, which, as time shows, are unlikely to materialize. This justifies gradual strengthening of the pound against the main peers - EUR and USD.

On the technical front, the pound is likely to test the upper boundary of the correctional channel (1.3850) against the backdrop of retreating USD:

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