BOE Shift Slams Pound

GBP remains the weakest among the G10 FX bloc as we start the new week. Sentiment in the Pound has undergone a significant shift in recent weeks with GBP now the worst performer across Q3 as a whole. A solid downturn in inflation over recent months had seen traders scaling back their BOE rate hike expectations, in line with signals from the bank itself. On the back of a further sharp drop in CPI last month, the BOE this month paused its 15-month tightening streak and signalled that rates may well have peaked.

UK Economic Risks & Fresh Fed Tightening Expectations

Alongside the drop in inflation, downside economic risks to the UK have also been flagged as a reason for pausing rate hikes. The release of weaker-than-forecast UK PMIs last week served as very timely evidence of those risks. Looking ahead, barring any unexpected upside in CPI, the BOE looks likely to remain on hold now which should keep GBP pressured. Finally, we’re seeing fresh upside in USD as market pricing for a further Fed hike this year has risen on the back of recent CPI upside. Against this backdrop, GBPUSD looks vulnerable to further losses near-term.

GBPUSD

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The sell off has seen the market dropping by almost 8% from YTD highs. Price has recently broken below the 1.2437 level and is now fast approaching a test of 1.2171. In line with bearish momentum studies readings, the focus is on further downside with 1.1843 the longer run bear target. 

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