GBP/USD after a strong up trend is now traveling sideways and we now expect the consolidation to end and a break to the downside to unfold.
In terms of rate cuts - Looking at what's priced before year-end, we can see 107bp priced for the Fed in terms of cuts and just 44bp for the BoE.
We think more easing will be priced for the BoE, which could lead to GBP/USD selling – we think interest rates are going to fall far quicker than the market and so does an ex-member of the Bank of England MPC:
A former member of the Bank of England's Monetary Policy Committee has said interest rate cuts will come faster than markets are currently expecting. "Fiscal tightening and the reduced impact of the cashflow channel argue for a fairly rapid return to a neutral monetary stance, to prevent inflation falling below target over time,"(Saunders in Note to Oxford Economics.)
We dont see the Bank of England being more hawkish than the Fed – inflation is coming down, the economy is stagnant and we have a cost of living crisis.
UK Chancellor Rachel Reeves is expected to raise taxes and give the market where money will be saved which will mean government spending will impact on growth going forward, giving the Bank of England the opportunity to cut interest rates.
Furthermore, the impact of the recent rate hiking cycle will continue to be felt for many months to come as long-term mortgage deals are rolled over by householders.
In conclusion, the Bank can cut rates but households will still feel the constraints of higher mortgage payments as they come off very low deals. "Interest rates may eventually fall further than the market path," Saunders noted.
We think GBP will have a major sell-off and take out the large number of speculators who are long on stop.
Sentiment
We have seen heavy buying by large speculators recently positions are elevated and smart money commercial hedgers are selling which points to limited upside and a major move to the downside.
Technical Analysis
The key levels of support and resistance to look out for are below.
