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Sharp Pound Rally a Greater Risk Than Selloff on BOE Outcome

Sharp Pound Rally a Greater Risk Than Selloff on BOE Outcome

Ilya Spivak,

Talking Points:

  • Majors flat in Asia as markets digest largest US Dollar drop in nearly a year
  • Bank of England rate decision, MPC minutes, Inflation Report in focus ahead
  • Steep skew in Pound positioning hints risk of sharp rally greater vs. alternative

Currency markets are treading water in Asian trade as investors digest yesterday’s aggressive burst of volatility. That move saw the US Dollar plunge against all of its major counterparts, handing it the largest one-day loss in almost a year.

The selloff was broad-based, with the benchmark unit falling against all of its G10 counterparts. Previously inverse relationships between currency pairs pitting greenback against “risk-on” alternatives like the Australian Dollar and “risk-off” ones like Yen broke down as the non-USD majors moved higher in unison.

The drop tracked a dovish shift in priced-in US monetary policy outlook as Fed Funds futures erasedbets on further interest rate hikes in 2016. No singular catalyst stands out as the trigger for the readjustment, suggesting it may have reflected pre-positioning ahead of Friday’s release of January employment data.

Looking ahead, theBank of England policy announcement is in focus. The release of an official statement as well as minutes from the meeting of the rate-setting MPC committee will be accompanied by the publication of the quarterly Inflation Report. This often coincides with inflection points in the central bank’s trajectory.

The markets are positioned for a dovish outcome. The priced-in rates 12-month BOE rates outlook implied in overnight index swaps (OIS) has dropped to the lowest level since May 2013. In fact, the baseline view now sees a 64 percent probability that rates remain unchanged and a 36 percent probability of a 25 bps cut by February 2017. That is a far cry from a baseline view pricing in at least one 2016 rate hike as recently as a month ago.

British Pound positioning suggests this dovish shift has entered the exchange rate to a significant extent. Indeed, the latest CFTC Commitment of Traders report shows Sterling speculative positioning is at its most net-short since July 2013.

This makes a dovish surprise unlikely. For that, officials would probably need to explicitly signal an about-face reversal from their preference for a hike as the next policy move, shifting the conversation from speculation about timing to the direction of policy itself.

On the other hand, the sharp skew in positioning warns that even a modestly hawkish tone – which could amount to something as mild as the suggestion that 2016 “liftoff” remains a possibility – may send the UK unit sharply higher. Given the markets’ voracious appetite for stimulus, such a result might also hurt risk appetite and punish sentiment-linked FX like the Aussie and Kiwi Dollars.

Are FXCM traders buying or selling GBP/USD ahead of the BOE announcement? Find out here.

Asia Session

00:30AUDNAB Business Confidence (4Q)4-1

European Session

06:45CHFSECO Consumer Confidence (JAN)-14 (A)-18Low
07:00CHFUBS Real Estate Bubble Index (4Q)1.41 (A)1.34Low
08:00EURECB President Draghi Speaks in Frankfurt --Medium
08:30GBPHalifax House Prices (MoM) (JAN)0.1%1.7%Medium
08:30GBPHalifax House Price (3Mths/Year) (JAN)9.0%9.5%Medium
08:30EURMarkit Germany Construction PMI (JAN)-55.5Low
09:00GBPNew Car Registrations (YoY) (JAN)-8.4%Low
09:00EURECB Publishes Economic Bulletin --Medium
09:10EURMarkit Germany Retail PMI (JAN)-50.5Low
09:10EURMarkit Eurozone Retail PMI (JAN)-49.0Low
09:10EURMarkit France Retail PMI (JAN)-46.6Low
09:10EURMarkit Italy Retail PMI (JAN)-50.2Low
12:00GBPBank of England Bank Rate (FEB 4)0.50%0.50%High
12:00GBPBOE Asset Purchase Target (£) (FEB)375B375BHigh
12:00GBPBank of England Inflation Report --High

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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