BoE, Sterling Outlook and Scenario Analysis:
- Sterling at the mercy of the UK CPI print and the Bank of England rate decision
- GBP/USD reveals downside potential after FOMC revisions
- Will the SNB cut again despite Chariman Jordan's currency comments?
The Bank of England (BoE) meets on Thursday where it is highly likely the Monetary Policy Committee (MPC) will keep rates at a 16-year high. Market participants will scrutinize every word from Governor Bailey and his cohort regarding the timing of the inevitable rate cut now that inflation is moving in the right direction, the economy has stagnated in April and the job market continues to ease.
A notable amount of repricing risk may present itself this week if May’s inflation data continues to decline and if there is a notable dovish shift within the committee. The vote split may remain 7-2 (hold-cut) due to the internal committee members historically moving as a group. When Dave Ramsden voted for a cut in May it was just the 6th time an internal committee member has voted against the majority since the start of the rate hiking cycle at the end of 2021.
Markets currently price in more than 25-basis points worth of easing in November but September is looking increasingly likely. A dovish statement/presser combined with softer CPI, and more importantly lower services inflation, could see the majority weigh up a possible move in August.
Implied Interest Rate Path (in Basis Points)
Source: Refinitiv, prepared by Richard Snow
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GBP/USD Reveals Downside Potential after FOMC Revisions
Sterling has been one of the better performers against the dollar this year, but the recent FOMC projections compromised its performance. The GBP / USD appears as a viable short from both a technical perspective and a positioning perspective.
On the technical side, the pair tests at a zone of support (1.2680) that had contained previous attempts to breakdown since late May. The RSI has only just breached the 50 mark, indicating the capacity for further selling before overheating. The 1.2585 level – which provided support during the drawn out period of consolidation at the start of the year – provides the next level of support followed by the 200 SMA around 1.2550.
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Speculative positioning form large speculators, hedge funds and other large institutions known collectively as the ‘smart money’, have piled into GBP longs widening the gap between longs and shorts. The sizeable net-long positioning provides a backdrop where a dovish surprise can lead to a very quick unwinding of some of the long exposure. The previous two peaks in long positioning appeared shortly after GBP/USD peaked and proceeded to drop.
CBOE Commitment of Traders Report (CoT) – Data accurate up until Tuesday 11 June
Source: Refinitiv, prepared by Richard Snow
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GBP/USD
Bearish
of clients are
net long.
of clients are
net short.
| Change in | Longs | Shorts | OI |
| Daily | 9% | 9% | 9% |
| Weekly | 18% | -17% | -1% |
Will the SNB Cut Again Despite Chairman Jordan’s Currency Comments?
The Swiss National Bank (SNB) is expected to issue another 25-basis point cut on Thursday according to market expectations. The implied probability derived from interest rate futures suggests a 70% chance of a cut from 1.5% to 1.25%. Interest rates are very low in Switzerland when compared to other developed nations but it has not struggled to appreciate in recent days thanks to comments from the SNB Chairman himself. Thomas Jordan previously stated that a weak franc is likely the biggest risk to the inflation outlook, leading to a sharp appreciation in the local currency despite markets looking for a second interest rate cut this year.
GBP/CHF exhibits a longer-term reversal pattern, a head and shoulders formation – although it isn’t the cleanest of formations and involves a compound left shoulder. After finding resistance at 1.1650, the pair reversed lower where it currently trades above 1.1245 – a prior level of resistance now acting as support. Bears will be hopeful for a series of events materializing in the following fashion: a dovish BoE with softer UK CPI and the SNB voting to hold rates despite the consensus view that they will lower rates. Such an outcome may bring the swing low of 1.1170 into focus.
In the event 1.1245 holds this week, upside levels to watch include 1.1462.
Source: TradingView, prepared by Richard Snow