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We have seen the GBP rally strongly to the upside and now expect the rally to end with a major move to the downside. Our logic is outlined in terms of the fundamentals, sentiment and technical levels to watch below...

UK Interest Rate Outlook

The GBP was strong last week: "GBP/USD rose by 1.29% last week, in a sign that the pound could be about to stage a bigger recovery as it has momentum on its side, now that the UK’s political risk premium has been eradicated. The next key level is $1.30. Interestingly, the pound is rising, alongside expectations of a rate cut from the Bank of England next month, there is currently a 66% chance of a rate cut priced in by the OIS market. " (Kathleen Brooks, an analyst at XTB.)

This week the GBP Got an additional boost - MPC member Jonathan Haskel (a known hawk) was the first to deliver remarks following the Bank of England's blackout period around the election. He unsurprisingly said that he will vote for interest rates to be kept on hold at his final meeting in August, highlighting inflation risks due to the tight labour market.” (INGTHINK)

The above comments helped sterling remain firm but it's not an accurate representation of the MPC’s consensus. Tomorrow’s speech by Chief Economist Huw Pill, who is a more neutral member, should shed more light on the current BoE view ahead of key CPI data next week which we expect to show slowing inflation – we think that an August cut will happen and we see more than two cuts this year as the Bank of England moves to help an economy which is struggling to grow.

Interest rate differentials at an Extreme

We agree with this view: “Looking at forward curves, it is remarkable that UK interest rates remain priced so close to the US. Both price are around 45bp of rate cuts this year and both have a terminal rate for forthcoming easing cycles around the 3.30/3.40% area. Our conviction view this summer is that UK rates will be repriced lower starting with a rate cut in August. And this should lead to a lower pound.” (DANSKE BANK)

Sentiment COT Net Trader Positions

Speculators are heavily long and this will limit any upside and should see considerable downside as they are taken out on stop. In terms of the COT Net Traders Positions our views and comments on the chart below...


Technical Analysis

Our view of the key levels of support and resistance to key off are on the chart below.




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