GBP on Track for More Volatility

• The GBP has grown very sensitive to fundamental surprises


• Voting Member challenges rates cut

The GBP closed the week at almost the same value it started with against the USD amidst obvious disappointments in the UK economic data. A tight economic calendar in the following week could well have a profound effect on investor’s sentiment, the coming Bank of England interest rate decision which is due in the next two weeks further compounds the situation.

The below average readings have ignited selling sprees all over the market, with interest rate traders currently placing the probability of a rate cut at the August 4 meeting at 90%.

An upcoming UK Q2 Gross Domestic Product (GDP) growth report will allow traders to have a clearer look at the economy’s strength during the moments preceding the UK referendum. Although the impact of the UK referendum will take a while to sink in before we can start to witness the full extent to which it has affected the GDP, any signs that point to the economy weakening right before the vote would almost certainly spell a death sentence on the outlook after the “Brexit”. Recent economic surveys depict an idea that since the Global financial crisis, the UK economy has not declined as badly as it did through July.

Study from the CFTC Commitment of Traders data shows that since the week of June 3, 2013, large speculators are now at their peak net-short positions on the GBPUSD.

The journey so far shows an uncertain and overall bearish look for economic sentiment as one of the world’s largest economy struggles with negative fundamental projections. But in contrast to the heightened levels of bad sentiment trailing the GBP, an important rally in the currency could still be spurred by a minor positive economic surprise as investor expectations for the UK economy remains extremely low.

Looking at the GBP’s quick rally on July 20, preceded by the surprising remarks made by Kristin, the Bank of England’s voting member, Forbes stated that the BoE’s monetary policy committee should not change the interest rates until more evidence of a post Brexit economic decline comes to light, which was in opposition to the BoE governor Mark Carney’s intentions.

The GBP is currently in a bearish slide as the strength of its downtrend cannot be overstated, but yet this also shows that an overall one-sided short betting elevates risks of a swift short-covering rally. While Forbes’ comments might have done very little to effect the big picture for the future of the BoE’s monetary policy, and the GBP which currently flutters around where it stood before the meeting was held, It was quite surprising for a voting member to break rank and speak firmly against rate cuts.

Investors should ultimately ready themselves for heightened GBP volatility by any surprises coming out of the GDP figures, and the focal point of any trader should be the possibility of the BoE deciding to ease policy or cut rates at their August meeting as the smallest surprises could ignite a big move for the currency.