With Non-Commercial Sterling short positions hitting record levels but GBP still rising, it is worth taking some time to consider the underlying dynamics that are fuelling this disconnect between positioning and price action, starting first of all with central bank policy.
BOE Take Hawkish Turn
At their recent meeting, the BOE took a hawkish shift with one member, Forbes, actually voting for a hike while “some members noted it would take relatively little further upside news for them to consider a more immediate reduction in policy support”. The phrase “some members” suggests that, not including Forbes, there are at least two other members on the verge of voting for tightening.
In terms of the latest data, the Monetary Policy Committee (MPC) also appeared less concerned with weakness in survey readings such as Retail Sales and PMI data sets. Alongside casting doubt on the reliability of Retail Sales as an indicator, the bank also highlighted that any slowdown in consumption should “be viewed in the context of other indicators” where recent indicators had “raised the possibility that overall aggregate demand growth might hold up even as consumption slowed”.
MPC Reaffirm February Projections
Consequently, the MPC made the case that underlying the judgements behind the February projections remain valid and that the conditioning assumptions supporting these, specifically “that there will be some modest withdrawal of monetary policy stimulus over the course of the forecast period” remain valid. Indeed, the MPC appeared comfortable referring to the more hawkish rate path displayed in the February projections in light of the recent uptick in financial conditions.
Clearly, the MPC has turned hawkish here but with the caveat of remaining data dependant. As such, the focus is now heavily on the upcoming inflation figures for February which are expected to see CPI moving back above the bank’s 2% target for the first time in four years. A print above this level is likely to further fuel the GBP rally.
Read more: https://www.orbex.com/blog/2017/03/is-gbp-turning-higher/