Key GBP/USD, GBP/CHF levels and scenarios to watch

BoE, Sterling Outlook and Scenario Analysis:

• Sterling at the mercy of UK press CPI and Bank of England rate decisions
• GBP/USD reveals downside potential after FOMC revisions
• Will SNB cut again despite Chariman Jordan’s currency comments?

The Bank of England (BoE) meets on Thursday, where the Monetary Policy Committee (MPC) is highly likely to leave rates at a 16-year high. Market participants will be scrutinizing Governor Bailey and his cohorts’ every word regarding the timing of the inevitable rate cut now that inflation is on track, the economy is flat in April and the labor market continues to ease.

If May’s inflation data continues to decline and if there is a significant dovish shift in the committee, there could be a significant risk of a revaluation this week. The vote split may remain 7-2 (suspended) because internal committee members have historically moved as a group. When Dave Ramsden voted for a cut in May, it was only the sixth time an internal committee member had voted against the majority since the start of the rate hike cycle at the end of 2021.

Markets currently expect a drop of more than 25 basis points in November, but September is looking increasingly likely. The dovish statement/pressure combined with a softer CPI and more importantly lower services inflation could cause most to consider a move in August.

Implied interest rate path (in basis points)

Source: Refinitiv, processed Richard Snow

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GBP/USD reveals downside potential after FOMC revisions

Sterling has been one of the better performers against the dollar this year, but recent FOMC projections have put its performance in jeopardy. GBP/USD appears to be a viable short from a technical and positional perspective.

On the technical side, the pair is testing the support zone (1.2680), which contained previous breakdown attempts since late May. The RSI has just crossed the 50 mark, indicating capacity for further selling before overheating. The 1.2585 level – which provided support during the extended period of consolidation earlier in the year – provides another level of support followed by the 200 SMA around 1.2550.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Speculative positions by large speculators, hedge funds and other large institutions, collectively known as “smart money”, piled up long GBP and widened the gap between longs and shorts. A dimensional net-long position provides a background where dove surprise can lead to a very quick release of a long exposure portion. The previous two tops in the long position came shortly after GBP/USD peaked and continued to decline.

CBOE Commitment of Traders Report (CoT) – Data is accurate through Tuesday, June 11

Source: Refinitiv, processed Richard Snow

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Will SNB Cut Again Despite Chairman Jordan’s Currency Comments?

The Swiss National Bank (SNB) is expected to issue another 25 basis point cut on Thursday, in line with market expectations. The implied probability derived from interest rate futures suggests a 70% chance of a cut from 1.5% to 1.25%. Interest rates are very low in Switzerland compared to other developed countries, but in recent days they have failed to appreciate thanks to the comments of the SNB chairman himself. Thomas Jordan earlier said a weak franc was probably the biggest risk to the inflation outlook, leading to a sharp appreciation in the local currency despite markets eyeing a second interest rate cut this year.

GBP/CHF is showing a longer-term reversal pattern, a head and shoulder formation – although it is not the cleanest of formations and includes a compound left shoulder. After finding resistance at 1.1650, the pair turned lower, where it is currently trading above 1.1245 – the previous resistance level, which now acts as support. Bears will be hoping for a series of events to materialize as follows: a dovish BoE with softer UK CPI and the SNB voting to hold rates despite the consensus view that they will cut rates. Such an outcome may bring the 1.1170 swing low into focus.

With the 1.1245 event holding this week, upside levels to watch are 1.1462.

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX