The Bank of England’s (BoE) policy decision and the Quarterly Inflation Report will be the major macro events of today.
The pound is under decent selling pressure with the BoE expected to cut the bank rate by at least 25 basis points and to revise the economic forecasts significantly lower following Britain’s decision to leave the European Union.
The BoE will deliver its first economic assessment regarding the UK’s post-Brexit era and is highly likely to lower its growth forecast for the third time in 2016. The outlook for inflation, unemployment rate, wages growth and the current account balance will be among the major talking points.
Of course, the BoE’s Governor Mark Carney will remind that a monetary easing will not be enough to solve the problems the UK may be facing ahead. The Brexit is a major political issue, which will result in a sizeable structural change, hence the fiscal side of the play will be as important, if not more.
The monetary action could only be a temporary relief and nothing more than a transitory solution for the UK’s economic future. Risk of unwind in short GBP positions
With all bad news being priced in, the market has become heavily short in sterling since the UK decided to walk away from a multi-decade partnership with the EU. In fact, investors have not been as shortly positioned in sterling since 1992.
Therefore, the unwind risks in short positions should not be ignored heading into the QIR. Although the pound continues considering a slide below the 1.30 level against the US dollar, the break of the critical support may not be on the ‘menu du jour’ (menu of the day). Should the BoE fail to meet the ultra-dovish expectations, we could see a sharp rebound in the GBPUSD. Cable is bearish below 1.3640
The pound-dollar is considered in a negative trend below 1.3640, the major 38.2% retracement on the post-Brexit sell-off. Although the sellers lacked momentum to drive the pound below the 1.30 psychological support against the US dollar, the 1.28 – 1.25 area is still on the radar.