Despite the recovery seen on Tuesday in the GBP/USD pair, the pound is not out of the woods. They consider risk appetite looks vulnerable and warn the pair could drop to 1.20 in a three-month perspective. 

Key Quotes: 

“The pound is the best performing G10 currency on a 1 day view as stronger than expected UK labour data raised the prospect that the BoE may have to go further with policy tightening to rein in inflationary pressures.  While a strong labour market is a good reflection of economic health, it is not good news for everyone insofar as higher interest rates will compound the impact of the cost of living crisis for many lower income households.”

“GBP/USD has pushed to its best levels since May 5 today with its reprieve being underpinned by a broad-based pullback in the USD. The softer tone in the USD reflects a better tone in risk appetite today. That said, we continue to view the medium-term outlook for risk appetite as vulnerable and don’t view GBP/USD as being out of the woods.”

“In addition to tomorrow’s UK CPI inflation release, the week ahead is yet to bring April retail sales numbers.  Surveys have already suggested that household balance sheets are being squeezed by higher prices.  The market consensus for the April release stands at -0.3% m/m.  A number in line with this is likely to be sufficient to take the wind out of GBP’s sails.”

“Under the weight of USD strength we see risk that GBP/USD could head as low at 1.20 on a 3 month view.  We see the potential for EUR/GBP to move to 0.86 on a 3 month view.”

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