GBPUK

Trader thoughts - The BoE seemingly have a communication problem

Chris Weston
Chris Weston
Head of Research
Nov 5, 2021
Economists were split on a rate hike from the BoE and the markets had discounted a token 15bp hike – that didn’t come.

Despite the BoE seemingly guiding to this outcome and so some have said the bank's communication credibility has been cut to pieces. Gov Bailey doubled down, commenting that the BoE aren't there to panda to markets, in turn, the bank have injected a degree of uncertainty that markets into future meetings and the GBP may wear a higher volatility into the 16 Dec meeting.

I guess the BoE joined the RBA and ECB pushing back on rate expectations, but I guess the BoE has done it in a far cruder manner. The Fed perhaps not pushing back as hard, and that may see the USD outperform near-term.

As I say in the video, we see 13bp of hikes pricing into UK rates for the 16 December BoE meeting, and that seems lofty now – I guess we look for the next jobs and CPI print on 16/17 Nov to solidify expectations there. Clients are largely buying this pullback in cable, with 75% of open positions held long now.

The USD more broadly is eyeing the top of its range of 94.50 (on the DXY). The fact US real rates fell 9bp and yet the USD found buyers interests me, perhaps the move in USTs was driven by UK gilts more than US domestic factors – however, we have US payrolls in the session ahead (23:30aedt/12:30 GMT) and that may move the dial a touch. The headline level of jobs creation will always garner the headlines but given the narrative in the markets is largely about inflation I would be looking for the change in wages to be key, especially if we saw the year-on-year change above 5% (consensus 4.9%). That could see the USD breaking out above 94.50 and EURUSD through 1.1524.

Watch Gold too as poor wage data may lower real rates and push XAUUSD into 1810 – a level that has seen supply of late. As said in the video yesterday, a break of 1810 really increases the prospect of 1833 – the line the Gold bulls are eyeing eagerly. Of course, a hot wage print and gold may head lower.

Crude has been predictably volatility 

Literally stuck to the playbook I detailed yesterday – the market was largely expecting OPEC to stick to its 400,000-output increase, and they not only did that, but the decision was incredibly rapid – with the US putting pressure on OPEC to increase by more than 400,000 barrels, the sheer pace of the decision means the prospect of the US and OECD more broadly releasing SPR into the market has clearly risen. Watch the 50-day MA in SpotBrent at $79.03 – I think that could offer support if we see further follow-through selling, but the real buying area for me is $76.15 – the former long-term downtrend.

Equities continue to power up – they're just so hard to short and while I turned a bit more cautious at the start of the week, the trend remains your friend and traders remain sellers of volatility. The S&P 500 has closed up 12 of the past 14 sessions and one has to look at the year-to-date gains of 24.6% and see that it becomes more of a FOMO trap into year-end. Hard to bet again US large-cap equity indices at present.

The Russell 2k (US2000) looks more interesting here, having broken out of the channel it held since March – a retest of the former channel may be on the cards, but if this kicks the sheer length of time it’s held the range suggests if this runs then it could be very powerful.

On the crypto side, ETH and DOT are gaining my attention having had good runs of late – clients are sensing 5000 on ETH, with 80% of all open positions held on the long side. I'm keeping an eye on XRPUSD and if this can break and hold 1.2000 then it could rip to 1.40 and above.

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