Don’t Let Cable Mislead: Pound Ready for Breakout via GBP/CHF, EUR/GBP

Talking Points:

- GBP, unlike EUR, enduring recent swell in shifting FX demands.

- GBPCHF much better opportunity than GBPUSD, GBPJPY.

- Forex economic calendar quiet until RBNZ Rate Decision on Wednesday.

The British economy is the strongest in the developed world in 2014, and today's release of various April and May labor data suggest momentum should continue through mid-year.

With jobs growth well-above expectations (3M at +345K vs +270K expected) and the unemployment rate plunging (ILO Unemployment Rate at 6.6% from 6.8%), the British Pound remains an appealing target for traders perhaps banking on tighter central bank policy over the course of 2014.

The only blemish to an otherwise impressive set of data was the confusingly weak weekly wage data. The Bank of England, among other central banks, have shifted their attention to wage pressures as a harbinger for not only inflation pressures (higher wages lead to more spending), but also as a sign that the labor market is getting 'tighter.'

Whereas the other data were a step in the right direction, this wage data undercuts the bulk of optimism generated towards an earlier-than-anticipated BoE rate hike.

Nevertheless, while GBPJPY and GBPUSD continue to be 'stuck in the mud' within ranges carved out of the past several weeks, both EURGBP and GBPCHF are nearing breakout points in favor of further Sterling strength. This is no coincidence either: since September 6, 2011, when the SNB levied the EURCHF floor at Sf1.2000, the EUR and CHF have maintained a +0.93 daily correlation. In other words, if GBPCHF breaks higher, look for EURGBP to break lower (and vice-versa).

Read more: EUR/USD Crashes Through Range Support as EUR/JPY Loses ECB Low

--- Written by Christopher Vecchio, Currency Analyst

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