Sterling Still Buoyant On Eve Of BoE’s Policy Decision

Only one day away from an awaited second successive BoE rate hike, the British pound has been trading on the front foot. The GBP/USD pair has recently surpassed its 21DMA at 1.3557 before running into resistance ahead of the 1.3600 level.

At current levels in the 1.3560 territory, the pair trades with on-the-day gains of about 0.3%, taking its on-the-week gains to about 1.3% and the rebound from last week’s sub-1.3400 lows to roughly 1.5%. While hawkish BoE bets ahead of Thursday’s meeting are one factor supporting GBP/USD on Wednesday, with the latest BRC Shop Price inflation figures jumping to near-decade highs and adding to inflation fears, dollar factors are also in play.

Market commentators are citing a combination of firstly; a paring back of long positions and secondly; a paring back on hawkish Fed bets following recent policymaker communications as the major driver of recent US dollar weakness.

Regarding positioning; MUFG noted on Wednesday that their 2yr z-score measure of Leveraged Funds’ long USD positioning is “at an extreme”, with USD longs at a level not seen since 2011. However, if position-squaring is indeed behind this week’s dollar weakness, the dollar’s positioning is now expected to have reached a somewhat more balanced level which can allow for some stabilization.

Regarding recent Fed speak, policymakers played down the prospect of a 50bps rate hike in March. Meanwhile, though policymakers speaking this week have unanimously expressed support for the start of a rate hiking cycle next month, most emphasized a data-dependent approach when it comes to determining its timing, pace and extent.

That implies that US economic data in the coming months will take on even more important than usual, starting with this Friday’s official January labour market report. The latest weak ADP national employment change figures have solidified expectations for a weak headline NFP number but did not impact Forex markets or GBP/USD too much given Fed members have said they are more focused on wage growth.