Where we are: GBP/USD is currently trading at 1.3626, up 0.25% on the day and testing the upper end of its intraday range (1.3590-1.3631). Sterling has gained ground during the European session, breaking above previous resistance levels. The move builds on yesterday’s gains and positions Cable to test 1.3650 resistance, before a run at the 1.3700 level.
What’s driving it: Sterling’s rally is primarily driven by dollar weakness, amplified by the risk-on sentiment evident in equity markets. Domestically, the market is quiet ahead of tomorrow’s Bank of England meeting. The MPC’s cautious stance, reinforced by the 8-1 vote to hold rates steady at 4.50% at the last meeting, keeps the market on edge, particularly given sticky services CPI. The upcoming MPC meeting will be critical, even if no move is expected: any shift in rhetoric towards a more dovish outlook, especially given Dhingra’s dissent, would be quickly priced in.
- UK 2Y yields have softened slightly, down 4bp to 4.320%, reflecting the market’s anticipation of a potential shift in the BoE’s policy stance.
- Crowded short positioning in GBP, evidenced by the -60,639 net non-commercial contracts, raises the risk of a squeeze, particularly if tomorrow’s MPC minutes surprise to the hawkish side or the data flow improves.
- The FTSE 100’s outperformance (+0.61%) relative to European peers suggests some domestic resilience, adding to the positive sentiment surrounding Sterling.
NY session focus: The main event for the US session is the 08:30 ET Unemployment Claims release. A higher-than-forecast print (above 205K) could exacerbate existing dollar weakness, pushing Cable higher. Conversely, a print below 189K would likely see a retracement back towards 1.3600. Keep an eye on US 10Y yields – a continued decline below 4.30% would support the risk-on move and benefit GBP. The working trade is to play Cable long above 1.3600, targeting 1.3700. A break below 1.3590 negates the bullish view. The pain trade for Sterling is a surprise hawkish signal from the BoE coupled with a recovery in the dollar driven by strong US data.