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Bearish View on Sterling Contingent upon Softer CPI, Dovish BoE

Bearish View on Sterling Contingent upon Softer CPI, Dovish BoE

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Pound Sterling's Fate Hinges on BoE's Stance, CPI Data

The Bank of England (BoE) is set to convene this Thursday, with the Monetary Policy Committee (MPC) expected to maintain interest rates at their current 16-year high. As inflation shows signs of easing, the economy stagnates, and the job market softens, market participants will be closely analyzing Governor Bailey and the committee's statements for indications of future rate cuts.

The upcoming meeting may present significant repricing risks, particularly if May's inflation data continues its downward trend and there is a noticeable dovish shift within the MPC. Historically, internal committee members have moved as a group, with rare instances of voting against the majority. A dovish statement, coupled with lower CPI and services inflation, could prompt the majority to consider a possible rate cut as early as August.

Implied Interest Rate Path (in Basis Points)

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Source: Refinitiv, prepared by Richard Snow

GBP/USD Reveals Downside Potential after FOMC Revisions

The pound sterling has been one of the stronger performers against the US dollar this year. However, recent FOMC projections have impacted its performance, making the GBP/USD pair a potential short opportunity from both technical and positioning perspectives. The pair is currently testing a support zone around 1.2680, with the RSI indicating room for further selling before becoming overheated.

GBP/USD Daily Chart

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Source: Refinitiv, prepared by Richard Snow

Speculative positioning from large institutions, known as the "smart money," has shown a significant accumulation of GBP longs, widening the gap between long and short positions. This sizeable net-long positioning creates an environment where a dovish surprise could trigger a rapid unwinding of some of the long exposure, as observed in previous instances where peaks in long positioning preceded drops in the GBP/USD pair.

As the BoE meeting approaches, market participants will be closely monitoring the MPC's stance, inflation data, and the overall economic landscape to gauge the potential impact on the pound sterling and future interest rate decisions.

CBOE Commitment of Traders Report (CoT) – Data accurate up until Tuesday 11 June

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Source: TradingView, prepared by Richard Snow

--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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