By Viraj Patel, Foreign Exchange Strategist
While the prospect of a May Bank of England rate hike will most likely come and go at this week's meeting, what matters for the pound is whether Governor Mark Carney is a man with or without conviction over future rate hikes. Risk-reward favours GBP/USD upside in particular - where we think the recent decline looks overcooked relative to the adjustment in short-term UK rates.
GBP outcomes to possible May BoE meeting scenarios
Source: ING estimates, Bloomberg
1. Market expectations: Curve adjusted to May rate hike rise and fall... all eyes on August now
Source: ING, Bloomberg
2. Dissecting the Rise and Fall: GBP's decline looks overcooked relative to the adjustment in UK rates
Source: ING estimates, Bloomberg
3. GBP positioning: Shaken but not stirred
Fast-money investors (leveraged funds) have, as expected, slashed their net long GBP/USD positions in half over the past few weeks - as odds of a May Bank of England rate hike have receded and USD sentiment has recovered. But the most surprising element of the latest CFTC positioning data is that asset managers have turned neutral on GBP/USD for the first time since summer 2014. This suggests one of two things to us:
For this week at least - and given the greater link between leveraged funds positioning and BoE policy sentiment - we think Governor Carney's reiteration that another rate hike remains likely this year should put a backstop to any further GBP positioning adjustment. Instead, the much cleaner positioning means that GBP/USD is more vulnerable to a sharper rebound in the event of a hawkish surprise (i.e., a 6-3 vote MPC split).
Source: ING, Macrobond, CFTC. Note: Positioning data as of 01 May 2018
GBP sentiment: Consolidation in risk reversals suggests limited scope for further downside
Source: ING, Bloomberg
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