Talking Points:
- After the BOE said that markets were underpricing the odds of a rate rise in the next few months, traders have started to drag forward expectations of a BOE rate hike in November.
- DXY Index tested its daily 21-EMA again this week, but still has not closed above it since June 22.
- Retail crowd positioning has eased, but remains near extreme levels in a few USD-pairs.
With the Bank of England saying yesterday that markets were underpricing the odds of a rate rise in the coming months, the British Pound has been given new life, soaring to fresh 2017 highs versus the Japanese Yen, Swiss Franc, and US Dollar.
A dramatic shift in rates pricing has been the driving factor behind the moves in GBP/CHF,GBP/JPY, and GBP/USD. Whereas at the start of this week rates markets were pricing in approximately a one-in-five chance of a 25-bps hike at the BOE's meeting in November, today they've soared to 64%, providing all the ammunition the British Pound needed to move to the topside.
The multi-month symmetrical triangle breakout in GBP/CHF and the multi-month ascending triangle breakout in GBP/JPY suggest that British Pound strength will stay in vogue and is not just a passing fad. With the next BOE meeting not until November 2, there is plenty of time for market pricing to shift more and drive the GBP-crosses further.
Elsewhere, one of our big focuses this week was on monitoring the US Dollar for signs that a bottom could be developing. Given price action seen this week, It's still far too soon to say that a low is in place for the US Dollar.
The DXY Index once again tested its daily 21-EMA this week, only to fail to close above it; it hasn't closed above its daily 21-EMA since June 22. Aside from the daily 21-EMA (now at 92.43), traders may want to wait for further confirmation for a DXY Index low until the August 25 bearish outside engulfing bar is cleared out at 93.44.
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