We believe that GBP/USD will crack 1.26 this week for a variety of reasons. First, sterling should benefit from euro safe haven flows. The French elections are front and center and the polls are very tight. Markets in Europe are closed today but we think investors will grow increasingly nervous as the week progresses and they will express their caution by selling euros. Also the U.S. dollar should also extend its slide after liquidity returns to normal on Tues. Last week’s retail sales and consumer price reports along with today’s Empire State manufacturing index were exceedingly weak, eliminating the chance of a June hike. President Trump is also trying to change the Affordable Health Care Act rules which could spell big trouble for the U.S. economy. Tensions remain high with North Korea and Russia, so geopolitical risks could also weigh on the dollar this week. Lastly, with no U.K. economic reports scheduled for release until Friday, sterling is bid and should extend its gains above 1.26
Technically, GBP/USD is forming an ascending triangle and appears poised to test the 200-day SMA at 1.2625. If that breaks, we should see GBP/USD hit 1.27.
