Chart of the Day: GBPUSD
It's arguably the biggest week of event risk so far in 2019, with the highlight being Thursday’s (04:00 AEST) FOMC meeting. We also have the Bank of England meeting, again on Thursday (21:00 AEST), with momentum behind a no-deal Brexit growing seemingly every day. Buying the GBP is a tough trade, and rallies are there to be sold, in my opinion.
With a defined wedge pattern and potential bullish divergence seen on the daily, should this pattern complete, it could compel short covering from a market currently holding a punchy net short position. I can define this positioning with a look at the weekly Commitment of Traders report, which highlights a net short position of 78,583 contracts in GBPUSD futures.
It’s easy to believe the BoE will remain dovish, though, ahead of a rising risk of a no-deal Brexit and the potential economic fallout. As such, the market is pricing 15bp of cuts from the BoE by December, with many believing the bank is behind the curve, with a need to take action even if we won’t know the outcome of Brexit for some time.
Much has been made of Boris Johnson’s pro-Brexit cabinet, and the personnel placed specifically to send a message to Europe that they’re to be taken seriously on leaving the EU with or without a deal on 31 Oct. This includes the appointment of the “Vote Leave” campaign’s director Dominic Cummings, who’s been tasked by Johnson to deliver Brexit by any means. This approach has clearly resonated with the British voters, and the Tory Party has surged in the weekend polls.
It's hard to see what drives the pair materially higher, but a less dovish BoE would contribute to this. Again, however, this seems unlikely. A 50bp cut from the Federal Reserve would also achieve a stronger GBPUSD, although the base case is that we see a 25bp cut from the Fed — married with an outlook that gives the clear impression the bank is ready to go again in September.
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