GBPUSD Tipped Lower as Renminbi Wobbles

"We doubt the negative sentiment on the UK will materially change" - Nomura.

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The Pound to Dollar exchange rate rose from period lows during the final session of the week but a wobbling Chinese Renminbi and the prospect of a sharp fall in the UK inflation rate next Wednesday have gotten strategists at Nomura looking for further losses in Sterling before long. 

Sterling climbed against the Dollar and a selection of other currencies on Friday amid sometimes contradictory headlines about the odds of a Congressional agreement to raise the U.S. government debt ceiling being reached before the government runs out of readily available cash.

Price action also came amid speculation of intervention by Chinese banks who're said to have been seeking to support the Renminbi after it fell below a series of important technical levels on the charts, while also appearing to pull other currencies lower alongside it. 

Sterling is known to be sensitive to the Renminbi but has also had domestic headwinds to contend with in signs of a deteriorating domestic labour market and uncertainty about the likely outcome of next Wednesday's inflation report.

"Our economics team expects a fall to 7.9%, which would be lower than the BOE’s forecast of 8.4%; if this materialized, it could weigh on GBP/USD," writes Jordan Rochester, an FX strategist at Nomura, in a Friday research briefing.

Above: Pound to Dollar rate shown alongside upside-down Dollar-Renminbi rate. 

"There is still another set of labour market numbers due ahead of the BoE’s June meeting, so this is not the last we will hear on jobs and wages before then, but with soft survey data, we doubt the negative sentiment on the UK will materially change," he adds while tipping the Pound to Dollar rate as a sell.

The consensus among economists suggests UK inflation will fall from 10.1% to 8.3% for the month of April next Wednesday, placing it a touch below the latest Bank of England (BoE) forecast and marking the first single-digit percentage inflation rate since August last year.

BoE forecasts were adapted last week to indicate a more bumpy path back to the 2% target for inflation but a less bleak, if not a somewhat brighter outlook for the economy in the years ahead, though next week's data will be an acid test of those forecasts with uncertain implications for Sterling.

Technically, inflation is a negative influence on the ‘fundamental value’ of currencies whenever not offset by matching increases for interest rates, and so arguments can be made to suggest that falling inflation should be a positive influence for the Pound-Dollar rate.

A negative correlation with inflation is a possibility in light of the large falls seen last year as inflation began to rise into the double-digit percentages, although inflation-currency correlations have been known to be positive in the past.

But in any case, Rochester and the Nomura team are looking for the Pound to Dollar rate to fall in response to any decline of inflation next week, and have tipped it as a sell in anticipation of a fallback to 1.20 over the coming weeks.

It is also possible, however, that another of the Nomura team's trade recommendations would be complimentary to sales of GBP/USD if it pans out. 

"We have also initiated a long USD/CNH position with a high conviction level of 4/5, targeting 7.30 (~4% gain) by mid-July. Apart from global factors keeping USD bid, we also see some local factors that should keep USD/CNH on an uptrend in the coming months," Rochester says.

"There is China’s slowing economy, as seen from April’s disappointing activity data, and we note that our economics team has recently cut their 2023 GDP growth forecast for China to 5.5% from 5.9%. There is also the risk of rate cuts by the PBoC," he adds. 

This recommendation comes after a series of important barometers of Chinese economic activity underwhelmed forecasts for the month of April this Tuesday in an indication that the rebound following the economy's reopening may be in the process of petering out. 

Above: Pound to Dollar rate shown at daily intervals alongside U.S. Dollar index and upside-down Dollar-Renminbi rate. Click image for closer inspection.