I personally am short GBP$ at these levels (see attached posts), and these comments from today have certainly reinforced my position given their dovishness, even more so when combined with yesterdays minutes which said "most MPC members expect to loosen policy in August" and "detailed analysis of all available policy tools is required" - both of which go hand as 1) they want to make sure they analyse the economy properly, which takes time (July too soon) yet all members expect August to be enough time to conclude/ act upon such analysis.
Not to mention, given bank forecast a median GBP$ price of somewhere near 1.225, being short in the 1.30+ imo is certainly probabilistically favourable, especially if you are able to execute close to the Post-brexit highs of 1.35 which has held as solid resistance and imo should do for the foreseeable future given we traded to lows of 1.38 before brexit so 1.35 is very expensive post brexit. Further, the median bank forecast was for a 25bps cut in the bank rate in July (with some calling for 40-50bps), so if that was the case in July, given BOE didnt deliver, this only increases the chances of a cut in August which imo will take GBP$ to 1.25xx.
USD demand increasing - Federal Funds Rate Implied PDF prices:
Also, on the USD side, demand is increasing which compounds the GBP$ short support, as the Fed Funds Rate implied hike probabilities are continuing to steepen. For example, since yesterday, the implied probability of a September/ November hike has increased from 12%/12% to 19.5%/20.8% - with, for the first time, a 50bps hike being priced at 0.4%/0.8% respectively; Decemeber's probability also steepened to its highest level post brexit to 40% from 33.7%, 50bps at 7.5% from 3.4% and 75bps for the first time at 0.3%.
This aggressive steepening in the rate/ probability curve is likely a function of the risk-on market we are in ( SPX 4 new highs in a row), with 10y rates rallying TNX , averaging +4% every day this week. Further, I think the FOMC speakers comments which have 80% been hawkish this week has also increased confidence.
Gov Mark Carney Speech Highlights
- Cannot Do Everything To Counter The Impact Of The Referendum
- MonPol Important In Cushioning Effects Of Any Relapse In Recovery In Months & Quarters Ahead
- BoE July Minutes, ''Broadly Consistent With My Personal View.''
- The MPC Does Not Have The ''Luxury ''
- Far Too Early To Draw Strong Conclusions On Precise Path Of The UK Economy
- UK Economy Is Unlikely To Crash, It Is Likely To Slow
- A Sharp Fall In Currency Rate Will Provide A Shot In The Arm To The UKâs Net Exports
- More Should Be Done To Cushion The Effects Of Negative Shocks
- Past Few Weeks Have Generated Considerable Uncertainty Around UK Economy, Policy & Politics
- Should Stand Ready To Move In Either Direction
- Brexit Has Increased Materially The Degree Of Uncertainty
- Some Of This Uncertainty May Dissipate, But A Good Chunk Is Likely To Linger Over Next 2-Yrs
- Uncertainty To Weigh On Domestic Spending By Both Companies & Households For Foreseeable Future
- The Amount Of Slack In The UK Economy Is Likely To Steadily Rise
- Already Some Evidence Of This Delaying Effect Among Companiesâ
- Despite The Sharp Fall In The Exchange Rate, No Indications Yet This Has Dislodged Medium-Term Inflation Expectations
Short GBPUSD @1.33-35 TP1 1.305 TP2 1.285 TP3 1.25xx