BoE set to cut as Sterling positioning stretches – ING

The Bank of England is widely expected to cut rates by 25bp today, with rising odds of a dovish vote split after weaker November inflation data. This points to near-term downside risks for sterling, ING’s FX analyst Chris Turner notes.

Dovish vote split risks short-term GBP dip

“The Bank of England announces the policy rate at 1300CET today. A 25bp rate cut to 3.75% is widely expected. Consensus is probably for a 5-4 vote as Governor Andrew Bailey switches to the dovish camp, though the risk is of a 6-3 vote, making this a dovish rate cut. Those risks have increased after yesterday’s pleasant surprise in November inflation – including a sharp fall in food prices. We look for further rate cuts in February and April, whereas market pricing only sees one cut during that period.”

“The above all sounds moderately sterling negative. The problem we have is that speculative positioning remains substantially underweight sterling already. Data published last night from the CFTC, covering activity after the November budget, shows asset managers still running a short position worth 38% of open interest (total positioning). Those levels remain on par with the shortest sterling positioning we have seen over the last five years.”

“The above could create a game plan where EUR/GBP spikes to the 0.8820/8840 area on the BoE rate cut, but comes all the way back – perhaps even to 0.8750 – on the ECB event risk, which takes place 1-2 hours after the BoE announcement and press conference.”