GBP/USD Vulnerable to Downside on Super Thursday
The Pound to Dollar could potentially see more downside following the BOE’s Super Thursday event, particularly if market participants are right about the Bank downgrading their growth forecasts.
Of course, there is a possibility that Kirsten Forbes, who voted for a rate hike at the last meeting, will be joined by another hawk but, even so, the bane of lower growth/higher inflation should offset voting patterns unless they are extreme.
With little else to fuel upside now that the election booster jab has worn off and scepticism is seeping in about how much even a large conservative majority can soften Brexit, there is little reason to buy the Pound.
If anything, it is the Dollar which is the rising star of the currency stratosphere as it enjoys a rebound following the recent lull on Trump reflation deflation.
“The dollar built on its rebound, scoring another sharp appreciation which allowed it to recover part of the ground lost over the past two weeks. As remarked in the past few days, easing political risk will now allow the markets to shift market focus back to the flow of macro information, and this – at least in the near term – should aid the dollar, given the prospect of a Fed hike already at its next meeting on 14 June,” said Intesa SanPaolo in a note to clients on the eve of Super Thursday.
Extremely low FX volatility, as noted by analysts from Investec and Deutsche, has also improved the prospects for the Dollar which tends to be positively correlated to volatility.
"Policy risks seem underpriced. The market anticipates a slow US hiking cycle, but benign financial conditions could encourage the Fed to be more aggressive," said Deutsche Bank's Oliver Harvey in note on the subject of low volatility.
The risk on super Thursday, therefore, is that the Pound will extend its declines versus the Dollar if the BOE remains neutral, and forecasts for growth are anaemic.
Charts Also Show Worrying Development
The bearish fundamental outlook for the pair is mirrored to some degree by the technical patterning on the GBP/USD chart.
The first thing to note is the very narrow range-bound activity of the last few days and the configuration of the daily ranges with a market propensity for the day to close near the open despite an extension in the range.
A cluster of these type of days can often predict a period of increased volatility and a sharp break lower, at the end of an uptrend.
The other feature to note is the MACD which has crossed its signal line and also completed a clear measured move or zig-zag higher.
Simply put the indicator looks bearish and we see propensity to more downside.
