GBP Jumps To Top Of SW Index As Markets Work To Price In BoE Hawkishness

Strong/ Weak Index: September 14, 2017

Highlights:

-The Bank of England struck a hawkish tone despite weak wage growth with unemployment in the UK the lowest since the mid-1970s. The market is now repricing a Bank of England rate hike into the February 2018, up from the May 2018 meeting. Some banks like Goldman Sachs are looking to a hike later this year. The 10yr Gilt Yield has risen by 20bps this week alone, which helps explain why the GBP has received such a bid.

-The US Dollar has aggressively moved up the rankings as many concerns such as North Korea, the Debt Ceiling, and Hurricanes galore have lessened and a potential hike to finish off 2017 is coming back into the picture. US CPI beat expectations on Thursday, and the question now becomes will the bearishness and pessimism of the US wane or will the longer-term deflationary fears continue the preference to sell now and ask questions later. Friday brings about US retail sales, and a reading over 0.2% m/m would encourage USD bulls further.

-While EUR is moving lower, the longer-term picture appears optimistic. Options traders are placing a premium on longer-term calls (bullish EUR). A one-year premium of calls to puts in EUR has not been seensince 2009. In other words, Draghi’s plea to talk down the EUR is falling on deaf ears or ears that are not fooled about the EUR economic momentum.

-NZ politics are having an impact and causing selling pressure. NZD/USD has fallen by over 1.8% against the GBP. The NZ polls show a bias to the opposition party heading into the election next week.

IGCS Highlight: GBP Bears doubt the Hawkish Tilt of the BoE

GBPUSD: Retail trader data shows 30.1% of traders are net-long with the ratio of traders short to long at 2.32 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.30402; price has moved 2.5% higher since then. The number of traders net-long is 10.0% lower than yesterday and 25.3% lower from last week, while the number of traders net-short is 1.3% lower than yesterday and 24.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bullish contrarian trading bias (emphasis added.)