GBP has recovered well from the sharp sell off seen in response to the weaker than expected UK production data on Tuesday. While the USD move overnight has generally been overdone, the move in GBP/USD corrects what looked like an overly aggressive sell off, and GBP/USD looks close to fair value here. The MPC’s Miles speaks today and while he is likely to reinforce his dovish stance, the fact that he is a well known dove means the GBP risk on his comments may be to the upside.
EUR/USD has tended to stick fairly closely to the path implied by forward points, so unless there is some deterioration in the credit picture in Europe, it is hard for it to gain any real traction on the downside, as there is no significant downside for 2 year Eurozone yields from here, and the upside for US yields has been capped by Bernanke for now. It is still possible that we will see a new low for the year in EUR/USD in the short term, but as with the new lows seen in GBP/USD this week, it may prove to be a time to square short positions rather than extend them. The move overnight looks overdone, with short term fair value in EUR/USD slightly below rather than above 1.30 at current yield spreads.
USD strength was corrected through the European session yesterday ahead of Bernanke, and was violently reversed in response to his comments. While the USD reaction after the FOMC minutes and Bernanke’s comments is certainly an overreaction, it is reasonable to see Bernanke’s comments as pushing back against the recent market bullishness on the USD and the potential for tighter Fed policy.