“Now is not the right time”

There is still room for further GBP upside over the short-term especially if there is a hawkish outcome from the BoE meeting tonight. If there is a hike this year it would most likely be a ‘one and done’ scenario as opposed to the beginning of a tightening cycle. Our view is for GBP to weaken from here by year-end and will use rallies to look for short GBP against EUR, CAD and AUD.

Hawkish outcome

A 5-3 vote and a positive economic outlook should see GBPJPY and GBPUSD rally as market positioning is exposed to a hawkish surprise given only a ~50% chance of a hike by year-end.

Dovish outcome

A 6-2 vote should cause GBP to weaken however, given hawkish comments from Carney and Haldane recently markets are unlikely to significantly lower the probability of a hike by year-endtherefore supporting GBP for the time being.

The BoE are wrestling with growth and inflation concerns as the makings of stagflation develop on the back of a sharp sterling depreciation eroding UK consumers ability to stimulate growth. In order to boost growth the BoE will try avoid GBP selling off. This task has been complicated by the hawkish tilt in central bank policy over the last few months, whichGovernor Carney noted in his speech at Sintra “signs that such a rotation may be beginning”. Given low growth, inflation overshooting and real wages being squeezed we do not expect to see the BoE tighten until Brexit uncertainties subside.

GBPUSD

Cable continues its gradual rise making higher highs and higher lows as it approaches the upper end of a trend channel sitting comfortably above the psychological support level. We wait for the character of the trend to be tested before looking to enter countertrend shorts.

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