GBPUSD was walloped last week, posting a decline of 2.11% for the period - its largest weekly drop since September 2020. The US dollar surged in the wake of the Fed’s hawkish surprise, sending cable below its 100-day simple moving average (SMA) and also blew past its lower Bollinger band.
However, the currency pair is now testing its 100-SMA as a key resistance, having recovered from near-oversold conditions when its 14-day relative strength index almost hit the 30 mark which typically denotes oversold conditions.
BOE to deliver another hawkish surprise?
Traders are certainly going to watch closely Thursday’s Bank of England policy meeting for any signs that policymakers could be readying to start withdrawing their support measures sooner than expected.
To be clear, the BOE is widely expected to leave the policy settings untouched this week. However, after the Fed’s surprise pivot last week, any hawkish signals out of this side of the pond could give GBPUSD a solid leg up above its 100-SMA.
There’s been enough market chatter about the BOE potentially towing the same line as the Fed.
Note that UK inflation rose by 2.1% year-on-year in May, surpassing the central bank’s target of 2%. Even with the low base effect (comparison from May 2020), there were enough price pressures linked to the UK economic reopening as seen in prices of clothing, footwear, restaurants and even hotels.
Also, outgoing BOE Chief Economist Andy Haldane had been sounding the alarm about soaring inflation. At the BOE’s meeting in May, he had already voted for a paring back of the central bank’s asset purchases. Likely to vote the same way this week, it remains to be seen whether Haldane can get more to adopt similar hawkish tones at his final meeting as an MPC member.
BOE still mindful of key risks
Still, policymakers are cognisant of several major factors which may kept the MPC sticking to its dovish stance. The delta variant of the coronavirus has already forced a delay to the UK economy’s full reopening. The UK’s furlough scheme is due to end at end-September, and the unemployment rate could tick higher once more.
Should any of these downside risks become more prominent, that could afford more runway for the MPC before they have to think about reining in its asset purchases which target 895 billion pounds at present. Of course, the opposite could happen too. If these downside risks subside meaningfully, that could ramp up the BOE’s willingness to ease up on its asset purchases.
On top of that, the BOE’s next set of economic forecasts are not due until August. Perhaps policymakers might wait until then to signal its change in tactics, with the updated forecast figures then giving more credence to the eventual pivot.
Markets turning bullish on Sterling
According to data from the Commodity Futures Trading Commission (CFTC) for the week through 15 June, leveraged funds raised their net long positions on the Pound for a second consecutive week to reach its highest level since April 2021. Asset managers however did the opposite, reducing their net GBP long positions for a second straight week to its lowest since mid-May.
Of course, this latest batch of CFTC data was for the period leading up to the Fed shocker; it’ll make for fascinating reading to see how markets’ positions have altered post-Fed.
In fact, Sterling has strengthened against most of its G10 peers, barring the US dollar and the Japanese Yen, in the days since last week’s FOMC meeting.
GBP Index to set new 2021 high?
Perhaps the optimism surrounding the UK economy that has fed into the Pound’s performance is best encapsulated in the GBP index, which is an equally-weighted index comprising the following pairs:
The GBP Index’s 20-day SMA has offered support while guiding it upwards, setting the index mere pips away from posting a new year-to-date high.
Such an achievement could be unlocked with another hawkish surprise twist out of the BOE this week, if it happens.
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