Dovish BoE Path to Coincide with Aus Inflation & RBA Rate Hike Odds

Bank of England Considers Rate Cut, Aus CPI May Lift RBA Rate Hike Odds

The Bank of England (BoE) will have the benefit of the updated monetary policy report to help decide on Britain’s first interest rate cut since the hiking cycle began in late 2021. UK CPI has reached the medium-term target of 2% before adjusting interest rates lower, largely due to a more stubborn component of inflation, services inflation, which remains at elevated levels. However, if the updated forecasts foresee inflation rising at a slower pace, there may be a slight majority on the monetary policy committee (MPC) voting in favour of a 25-basis point cut this time around.

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Markets are divided on whether the BoE will be confident enough to lower interest rates but do slightly favour a rate cut (58.6%).

Source: Refinitiv, prepared by Richard Snow

Aussie Inflation Runs the Risk of Stoking RBA Rate Hike Odds

Australian inflation is expected to have risen from 3.6% in Q1 to 3.8% in Q2 (yellow line below). This is despite the monthly indicator expected to reveal lower price pressures in June. The Reserve Bank of Australia (RBA) admitted it discussed the option of rate hikes in prior meetings, meaning a quarter-on-quarter move higher could reignite interest in rate hike odds for the second half of this year – potentially strengthening the Aussie dollar.

Source: Refinitiv, prepared by Richard Snow

Record Net-Long Positioning Underappreciates GBP Downside Risks

Large speculators that are obligated to report positions to the FCTC, otherwise known as the ‘smart money’, have grown their combined long positions in sterling to record levels – potentially underappreciating a rate cut from the Bank of England or even a dovish prelude to a possible cut in September.

With so many longs, a sharp correction may lead to profit taking (selling to close) which could weigh on sterling as the gap between longs and shorts converge. Even if the BoE decides not to cut this week but sends a message that September appears more likely, sterling may be unable to resist the current correction for long.

CoT Report Showing Large Speculators’ Longs, Shorts and Net Positioning up to 23/01/2024

Source: Refinitiv, prepared by Richard Snow

The bearish view on sterling can be expressed in a number of ways but the GBP/AUD pair offers a notable risk to reward ratio. The bullish move peaked at 1.9750 and has found support at 1.9570. A bearish move below 1.9570 opens up the possibility of a move towards 1.9350 or even 1.9185 where both the 50 and 200-day SMAs congregate. In addition, the RSI, although it has moved lower, is yet to move out of overbought territory and this suggests a deeper correction may be in the works.

GBP/AUD Daily Chart