Pound / US dollar exchange rate faces upside risks in the near term say RBS

We thought the summer would bring significant event risk for GBP crosses and we haven't been disappointed so far. The Bank of England (BoE) and ECB have unveiled a clear dovish bias but last week also saw Bernanke pushing back Fed tightening expectations.

While it seems unlikely we'll get back to the abundant liquidity fuelled market rally of earlier in the year, a commitment to ultra loose Fed policy may provide some impetus for risk positive sentiment.

GBP/USD has rebounded from 3 year lows despite a stalling in the recent string of better than expected UK data releases.

May manufacturing output came in much softer than forecast at -0.8% mom and there were grim back revisions. While the UK does still appear on track to show a pick up in activity in Q2, the data is a reminder that the surveys have tended to run ahead of the official data.

This could mean that the recent marking up of Q2 GDP expectations may potentially look a little optimistic.

RBS GDP tracker forecasts 0.6% qoq in Q2, but with downside risks. We have been a little sceptical over how long the string of better UK data can continue given squeezed real disposable incomes, deleveraging, austerity and weak external demand.

Hence this week's data will be important; CPI (16th), labour market data (17th), retail sales (18th) and pubic finances (19th).

The BoE minutes (17th) will also be key, particularly the vote count given Carney may have voted in favour of more QE.
 
For GBP/USD, events in the US are also key. The USD remains vulnerable to Fed tapering expectations as seen from last week's Bernanke speech and the FOMC minutes.

The latter implied that the Committee generally appeared more open to tapering but a further improvement in the labour market outlook is needed.

The minutes also seemed to go out of the way to underscore that tapering is different than tightening.

This same point has been made by Bernanke and his latest speech showed a more dovish bias than expected.

While we still think the Fed is on track to taper in September, the rise in yields is clearly a concern.

It would seem that the Minutes and speech were an effort to try to calm the market and make clear that if financial conditions tighten too far on the back of tightening assumptions, then the Fed would respond.

This has seen the market reassess some long USD positions. Strategically we still expect further USD gains this year, but the market may be reluctant to re-establish positions ahead of Bernanke's semi-annual Humphrey-Hawkins testimony on 18 July.

So while we see GBP/USD trading around 1.45-1.50 this year, risks may be skewed to the upside in the near term.
 
EUR/GBP looks to be battling a more dovish BoE and ECB. Comments from a couple of ECB members have left some confusion over forward guidance. However, it would seem that guidance is conditional on the economic recovery and there is no specified end-date.

With an August rate cut looking a close call, data and yields will be important over coming weeks.

Periphery yields have traded higher amid renewed political and fiscal risks and there could be further upside near term.

A heavy week of UK data and events suggests EUR/GBP risks may be skewed modestly to the upside near term.