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BoE Sings Dovish Tune - How Threatened are GBP Longs?

BoE Sings Dovish Tune - How Threatened are GBP Longs?

2014-07-23 11:30:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- GBPUSD testing TL from July 2013 low, could fall to 1.6920.

- EURGBP, GBPCHF nearing former pivotal thresholds.

- Reminder that July forex seasonals in QE era work against USD.

The Bank of England is clearly shifting its bias, but it's also evident it's a long, drawn out process. The path to tightening monetary policy began at last August's Quarterly Inflation Report, and the path was recently illuminated once more when BoE Governor Carney said that interest rates "could happen sooner than markets currently expect.”

One observation that the BoE made in its July meeting minutes was that market participants increased bets that an interest rate hike would be coming in Q1'15; at the June meeting, the BoE had observed that market participants were pricing in a hike in Q2'15. Rate expectations are up, and the British Pound has surely benefited.

That being said, the BoE made sure to draw the line right there in terms of noting rising rate expectations; effort was made to highlight the weaker aspects of the economy. Citing weak real wage growth (which we've discussed recently here), the BoE warned that "premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain."

In the video above, we review these fundamental points as well as look at the technical aspects of several GBP-crosses: EURGBP, GBPCAD, GBPCHF, and GBPUSD. While we are not looking to sell the British Pound - it is explicitly a long-only trade from our swing perspective - it is cautioned that a number of significant uptrends in these pairs are currently being threatened.

Read more: Managing USD Expectations with EUR/USD, USD/CAD (but not USD/JPY)

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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