Short GBP/USD with BoE meeting in focus – Nomura

Research Team at Nomura, suggests that despite being a market favourite they still like short GBP/USD into the BoE meeting this week entering at 1.2950 and expect to finish the week around 1.27.

Key Quotes

“There are some US data (CPI, retail sales) this week, but as NFP failed to move G10 pairs much we doubt we will see an outsized market move from these releases for the time being.

Elsewhere, there are some inflation data in Europe and other mid-level data releases but the main market focus in the G10 will be the July BoE meeting on Thursday. Our economics team expects the BoE to remain on hold at this meeting but sees a high risk of a cut (30% probability, see page 8 of China and BoE in focus).

The street, however, is much more aggressive than that in its pricing, and has 19bp possibility of cuts priced in for Thursday. In FX strategy we see a risk that the Bank acts more aggressively than what is priced, so given the balance of probabilities, we think the market pricing is a fair reflection of the risks at this point. Even if the BoE leaves its policy unchanged as our economists expect, communication should be dovish and market expectations for August easing remain high. We expect GBP selling demand to emerge soon, and risk-reward is skewed to the downside into the BoE meeting at the current spot level.

The street’s positioning has been short GBP/USD and GBP/JPY for weeks now. Consensus trades have been the market’s pain trade that hasn’t paid off for a good part of 2016, with some extreme position squeezes that have made it a tough year to say the least. The trend is in place though, and we stick to our view that more downside GBP is yet to come.”