The GBP has seen a major fall to the downside and could be set for more weakness – Our view of the fundamental’s sentiment and key technical levels to look out for are noted below.
Coming into the recent CPI report the market was looking for a terminal BoE rate above 6.00% and seeing no big recession in the UK – This optimistic view saw speculators build up their biggest long position since 2104 which we can see on the chart below.
GBP COT Net Traders Positions
Furthermore, on the shorter-term chart below, we can see on the COT Net Traders Positions that smart money commercial hedgers drop heavily short against speculative long positions – keep in mind commercials are hedgers and only move their hedges aggressively when they think fair value has been overshot.
UK CPI Inflation and UK Interest Rates
In terms of inflation, it fell back below 7.9% (below forecasts), more importantly, inflation was 0.4% MoM which is the lowest level since early 2022. We know that the BoE is mostly focused on service inflation, and this component fell from 7.4% to 7.2%, contrary to the BoE’s own expectations.
The post-CPI Sonia curve in terms of future interest rates saw a big change after the data with 36bp priced in for August and 90bp to the peak, which marks a move down of 55bp since last week.
The GBP has sold off on this but there are more problems ahead because even if the Bank of England only raise rates as expected the UK economy is set for a recession.
UK Economy Set for Recession
“U.K. growth has lagged behind the world’s biggest economies since the Covid-19 pandemic and is substantially below the OECD average, according to a new report from the influential Paris-based group.” (CNBC)
U.K. gross domestic product has contracted by 0.4% between the fourth quarter of 2019 and the third quarter of 2022, versus cumulative 3.7% growth in the 38-member Organisation for Economic Co-operation and Development.
The USD on the other side of the pair looks oversold against interest rate perceptions with the market seeing only one more hike then cuts in early 2024.
We think there is far more downside in the GBP and the speculative long position has further to unwind.
In terms of the key technical levels of support and resistance to look out for there noted on the chart below.