We have done numerous articles in the last few weeks in terms of GBP/USD and our bearish view and while we have seen some downside but so far its been minor but the Bank of England meeting is coming up and we expect a move up in volatility.
Bank of England Meeting – Market Positioning and the Reaction to a Cut and a Hold
“Britain’s Finance Minister Rachel Reeves on Monday announced a raft of project cuts after detailing how the newly elected Labour government has inherited a projected overspend of £22 billion ($28.2 billion) from the center-right Conservatives. In a highly anticipated statement to the House of Commons, Reeves pledged to make the “necessary”, “urgent” and “incredibly tough” choices to restore the country’s economic stability.” (CNBC)
The country is in a mess economically, inflation is falling so it's time to cut rates either this month or next month.
"Markets are already pricing in a BoE rate cut in September, which we also now expect. We therefore doubt that the GBP will benefit much if the BoE holds steady on Thursday. If the central bank kicks off the heavy easing cycle we still expect over the coming months and in 2025, this will likely weigh on sterling. " (Roberto Mialich, FX Strategist at UniCredit.)
He adds: "The UK economy remains weak and new fiscal policies in the UK will probably be important variables for sterling. However, stretched public finances and self-imposed fiscal rules leave little room for action on this front. Monetary policy, therefore, will probably play a greater role in helping the UK economy.” It will, interest rate cuts are needed and Uncredit's view of interest rate cuts is more dovish than the market.
What will the reaction be to a cut or even a hold by the Bank of England?
"Positioning implies that the pound may become more sensitive to disappointing news or to dovish takeaways from the BoE which indicates scope for more volatility," (Jane Foley, Senior FX Strategist at Rabobank.)
We have a record net long position held by speculators as we come into the meeting in fact, the position has hit a new record for the last four weeks which points to limited upside and major downside...
"Headed into the rate meeting we think the risks are skewed asymmetrically to GBP weakness if the BoE cuts. Two factors suggest this: positioning as IMM GBP longs are crowded; and the rise in market volatility which historically has been bearish for the high beta currencies." (Kamala Sharma Bank of America)
The GBP is a high BETA currency but in the short term, it's the positioning as we come into the meeting which is most important so what do speculators expect?
“Markets have remained more hawkish than consensus, having kept the pricing for the August meeting within 14bp for the past month, and are currently expecting 13bp. We think there is some mispricing also on the year-end tenor, which currently sees 52bp of cuts against our call for 75bp. If the BoE does cut this week, then expectations may shift for two extra moves.” (ING THINK) The views of ING below we agree with their base case but our targets are much lower due to speculative positioning...
We expect a 25 bps cut at this meeting and two or potentially three more cuts into the year. The GBP has significant downside but what if the BoE dont cut?
"The conditions are in place for the MPC to cut, but we think they will wait until September to avoid surprising markets. A firm commitment to a September rate cut would make this a 'dovish' hold, which is not entirely consistent with a rebound in the Pound.” (Andrew Goodwin, Chief UK Economist, Oxford Economics.) It won't lead to a major rally in our view and speculators in this scenario would exit the market.
Sentiment The COT Net Trader's Positions
We saw a big decline after the record divergence in March and now expect the GBP to have a similar or even bigger move to the downside.
Technical Analysis
In terms of the key levels of support and resistance to look out for are on the charts below.