Forex Investment and Currency Trading

GBP has the unenviable distinction of being the only G10 currency to underperform the USD over the past month and a half. The GBP has been responding to local events more than general USD weakness and remains the G7 currency most highly correlated with its domestic data surprise index. Analysts attribute this correlation to GBP’s heightened sensitivity to the outlook for UK monetary policy and the influence the local data rollout has on this outlook. CPI data on Tuesday will be an important event for GBP this week – inflation, along with activity data, will be key to determining whether QE will be halted in November or not. In the August Inflation Report, the MPC forecast 1.3% y/y inflation in Q3. While price action in GBP remains very weak, an upside inflation surprise could reverse this. Note that CFTC data show that, as of Tuesday last week, the net short GBP position had increased sharply its highest level on record, indicating that positioning may be extreme.