The Bank of England (BoE) meets on Thursday, and it is highly likely the Monetary Policy Committee (MPC) will maintain rates at a 16-year high. Market participants will closely examine Governor Bailey and his colleagues’ statements regarding the timing of an inevitable rate cut, given that inflation is moving in the right direction, the economy stagnated in April, and the job market continues to ease.
A notable amount of repricing risk may arise this week if May’s inflation data shows further decline and if there is a significant dovish shift within the committee. The vote split may remain 7-2 (hold-cut) due to the historical tendency of internal committee members to move as a group.
When Dave Ramsden voted for a cut in May, it was only the sixth time an internal committee member 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 or press conference, combined with softer CPI, and more importantly lower services inflation, could prompt the majority to consider a possible move in August.
Sterling Shows Downside Potential After FOMC Revisions
Sterling has been one of the stronger performers against the dollar this year, but recent FOMC projections have compromised its performance. The GBP/USD pair appears viable for a short position from both a technical and positioning perspective.
Technically, the pair is testing a zone of support at 1.2680 that has held since late May. The RSI has only just breached the 50 mark, indicating further selling potential before overheating. The 1.2585 level – which provided support during the consolidation at the start of the year – is the next level of support, followed by the 200 SMA around 1.2550.
Speculative positioning from large speculators, hedge funds, and other large institutions, collectively known as the ‘smart money’, has resulted in significant GBP long positions, widening the gap between longs and shorts. This substantial net-long positioning suggests that a dovish surprise could lead to a rapid unwinding of long exposure.
The previous two peaks in long positioning occurred shortly after GBP/USD peaked and then dropped.
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. Interest rate futures imply a 70% chance of a cut from 1.5% to 1.25%. Although interest rates are very low in Switzerland compared to other developed nations, the franc has appreciated recently due to comments from SNB Chairman Thomas Jordan, who stated that a weak franc is likely the biggest risk to the inflation outlook.
GBP/CHF exhibits a longer-term reversal pattern, a head and shoulders formation – albeit not the cleanest formation and involves a compound left shoulder. After finding resistance at 1.1650, the pair reversed lower, currently trading above 1.1245 – a prior level of resistance now acting as support.
Bears are hopeful for a series of events: a dovish BoE, softer UK CPI, and the SNB holding rates despite expectations of a cut. Such an outcome may bring the swing low of 1.1170 into focus. If 1.1245 holds this week, the upside levels to watch include 1.1462.