GBP/USD in the crossfire of BOE, FOMC

We finally get a bit of a breather from the US election. Although soon enough we will get an onslaught of updates regarding cabinet picks for the latest Trump administration, and what it means for investors and foreign relations (friends and foes). But for now we can shift out attention to today’s BOE and FOMC meetings, making it an ideal time to catch up on GBP/USD.

The Fed is expected to cut by 25bp today to 4.5%-4.75%, with Fed fund futures implying a 97.5% chance. Although Trump’s election feat has seen odds of a December cut drop to 67.2% from 80% just a few days ago. And with his policies deemed the more inflationary, odds of cuts next year are far from certain. There is therefore a real risk that the Fed will not deliver much of a dovish undertone which could further support the USD, or at least cap its potential for a decent retracement.

The BOE might cut by 25bp today, but confidence of it has waned since the release of the UK budget. And even if they do cut today, another in December seems unlikely.

So we may be in for a bit of a deadlock for interest rates with just 25bp of cuts expected for each bank for the rest of the year. Unless of course the Fed decide that it makes more sense to deliver a dovish cut, and squeeze 50bp of easing in before Trump takes to office in January. And that could be bullish for GBP/USD.

GBP/USD futures positioning – COT report

GBP/USD is currently within its sixth week lower, a bearish sequence not seen for just over a year. This week’s range overlaps last to show a lack of progress for bears, and if it were to close the week around current levels it would be deemed a long-legged doji. This week’s low has also respected the 200-week SMA as support, which is a decent level of potential support.

Asset managers flipped to net-short exposure two weeks ago and large speculators reduced net-long exposure to a 6-week low. Yet the moves have mostly been down to a closure of longs as opposed to a surge in short bets against the pound. I’m therefore inclined to bet that longs could pick up over the near-term and support the pound, unless they surprise with a dovish cut today.

GBP/USD technical analysis

GBP/USD has fallen nearly -5% since the September high. The three-day rally into the US election was followed by an aggressive outside day, yet it managed to hold above the 200-week and 200-day SMA. Support was also found around the weekly VPOC (volume point of control). If the BOE refrain from cutting and the Fed leave the door open to further cuts, GBP/USD could head for 1.30.

The 1-hour chart shows a false break of the November 1 low and is now within its third leg higher. I suspect GBP/USD is now trying to fill some of the liquidity gaps left during yesterday’s decline.

Given the strong levels of support around the 1.2850 area (SMA, VPOC) and the rebound higher, the bias is for a move to 1.30. Bulls could seek dips towards 1.2880/90 or refer to lower timeframes and seek bullish continuation patterns.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge