BoE, Sterling Outlook: GBP/USD, GBP/CHF key levels and scenarios to watch

BoE, Sterling Outlook and scenario analysis:

• Sterling is at the mercy of the UK CPI print and the Bank of England’s interest rate decision
• GBP/USD Reveals Downside Potential After FOMC Revisions
• Will the SNB cut again despite Chariman Jordan’s comments on the currency?

The Bank of England (BoE) meets on Thursday. It is very likely that the Monetary Policy Committee (MPC) will keep interest rates at their highest level in 16 years. Market participants will be closely watching every word from Governor Bailey and his cronies on the timing of the inevitable rate cut now that inflation is moving in the right direction, the economy has stagnated in April and the labor market remains relaxed.

There could be significant repricing risk this week if May inflation numbers continue to decline and there is notable easing within the committee. The vote split can remain 7-2 (hold-cut), because internal committee members historically move as a group. When Dave Ramsden voted for a cut in May, it was only the sixth time an internal committee member had voted against the majority since the rate hike cycle began in late 2021.

Markets are currently pricing in a easing of more than 25 basis points in November, but September is looking increasingly likely. A softer statement/urge combined with a softer CPI and, more importantly, lower services inflation, could lead the majority to weigh a possible move in August.

Implied interest rate path (in basis points)

Source: Refinitiv, prepared by Richard Snow

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GBP/USD Reveals Downside Potential After FOMC Revisions

Sterling has been one of the better performers against the dollar this year, but recent FOMC projections put its performance in jeopardy. The GBP/USD appears to be a viable short position from both a technical and positioning perspective.

On the technical side, the pair is testing in a support zone (1.2680) where there had been previous breakout attempts since late May. The RSI has only just crossed the 50 mark, indicating that there is still sufficient selling capacity before overheating occurs. The 1.2585 level – which provided support during the extended consolidation period at the start of the year – provides the next level of support, followed by the 200 SMA around 1.2550.

GBP/USD daily chart

Source: TradingView, prepared by Richard Snow

Speculative positioning from big speculators, hedge funds and other large institutions collectively known as the ‘smart money’ has piled into GBP longs, widening the gap between longs and shorts. The sizeable net long position provides a backdrop where a moderate surprise could lead to a very quick unwind of part of the long exposure. The previous two long positioning peaks appeared shortly after GBP/USD peaked and then fell.

CBOE Commitment of Traders Report (CoT) – Data accurate through Tuesday, June 11

Source: Refinitiv, prepared by Richard Snow

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Will the SNB cut again despite Chairman Jordan’s currency comments?

The Swiss National Bank (SNB) is expected to implement another interest rate cut of 25 basis points on Thursday, depending on market expectations. The implied probability derived from interest rate futures suggests a 70% chance of a cut from 1.5% to 1.25%. Interest rates in Switzerland are very low compared to other developed countries, but rates have had no trouble appreciating in recent days thanks to comments from the SNB chairman himself. Thomas Jordan previously said a weak franc is likely to pose the biggest risk to the inflation outlook, leading to a sharp appreciation of the local currency even as markets look for a second rate cut this year.

GBP/CHF is showing a longer term reversal pattern, a head and shoulders formation – although it is not the cleanest of all formations and there is a compound left shoulder. After finding resistance at 1.1650, the pair returned lower where it is currently trading above 1.1245 – a previous resistance level now acts as support. The bears will be hopeful of a series of events that will materialize in the following way: a dovish BoE with a softer UK CPI and the SNB voting to keep rates on hold despite the consensus view that they will cut rates. Such an outcome could bring the swing low of 1.1170 into focus.

In this week’s 1.1245 event, there are upside levels to watch, including 1.1462.

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX