The US Dollar is vulnerable to a sharp upside repricing if the Fed hikes rates at the March FOMC. Although the market has already swiftly repriced the likelihood of a March hike following the recent Fed comments, the pricing for the cumulative increase in rates over the next two years has only changed slightly. A hike in March could pave the way for two more hikes over 2017 if data remains consistent over the year.

GBPUSD

Considering the current environment in terms of tactical positioning and political risk, GBP looks like the best vehicle for expressing a long USD bias. Macro and monetary policy both suggest a lower GBPUSD rate with political uncertainty linked to Brexit exerting downside pressure. The triggering of Article 50 is going to happen at some point over the next few weeks, and exit negotiations are likely to be tough for the UK as EU leaders are unlikely to make an easy path for the UK to leave the union. Furthermore, recent data has started to show weakness in the post-referendum landscape with PMI data sets heading lower while wage growth has stalled well below the BOE’s inflation target. The squaring of short positions over recent weeks also creates plenty of scope for downside momentum on an upward repricing of US rates.

Price is still moving within a clear bearish channel formed on the post- flash crash correction. Having broken through the rising trend line from year to date lows, the focus is now on the downside with the January low of 1.1984.

EURUSD

For EUR an uptick in activity as well as an improved inflation outlook are providing support while political risk linked to the upcoming Eurozone elections are exerting downside pressure. Given the uncertainty around the election, it Is difficult to gauge direction in EURUSD. On one hand, there is the potential for severe re-denomination risk to accrue in EUR and EUR-denominated assets if Le Pen wins the French election, although this is the outsider scenario.

In this situation, EUR would likely accelerate below parity. However, there is also the potential for a sharp move back into the 1.10 – 1.20 zone if Macron wins the election (as expected) and discussions build around the ceding of some French sovereignty to Brussels regarding better fiscal integration. This occurring at a time where GDP is moving notably above trend would be enough to fuel a rally In EUR and EUR assets.