It looks highly likely that both the Federal Reserve and the Bank of England will hike their borrowing rates by 75 basis points this week, as both central banks continue to struggle with persistently high inflation. While both announcements will be closely watched, it is the post-decision rhetoric that will need to be closely parsed for any indications of the path of rate hikes going forward. Using current market pricing, it is a near 50/50 call whether the Fed hikes by 50bps or 75bps at the December meeting, and it is this future pricing that needs to be followed. The recent risk-on move has been in part driven by a growing feeling in the market that the Fed may pare back on the speed and size of future rate hikes going into next year to see if the economy can withstand sharply higher rates.

The Bank of England will also hike sharply this week – there is a 98% chance of a 75 basis point increase – and will look to continue hiking rates in the coming months although the size of each hike is still open to debate. New PM Rishi Sunak and Chancellor Jeremy Hunt have stabilized the British Pound over the last couple of weeks and bought borrowing costs down. The UK will also reveal its autumn budget on November 17 and the fiscal implications of this – markets are talking about up to GBP50 billion of spending cuts or tax rises – will also shape the BoE’s monetary policy decisions for the rest of this year and next.

Cable is now treading water ahead of the two central bank meetings with little reason for traders to open a new position. There is support down to the 1.1420 area, while resistance is seen around 116.40. With cable currently trading right in the middle of this range, traders should wait on the sidelines until later in the week.
 

GBP/USD Daily Price Chart

(Click on image to enlarge)

Chart via TradingView

Retail trader data show 51.15% of traders are net-long with the ratio of traders long to short at 1.05 to 1. The number of traders net-long is 5.20% higher than yesterday and 11.35% lower than last week, while the number of traders net-short is 4.72% higher than yesterday and 8.84% higher than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

What is your view on the British Pound – bullish or bearish?

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