FX Traders Juggle US Dollar Outlook, Hawkish BoE Boosts GBP To 1.34

Highlights:

  • Markets begin to look toward a BoE tightening cycle, maybe as soon as November
  • US CPI causing markets to pause on USD bearishness, but Fed terminal rate still
  • Crude Oil broke out above the $50-mark and 200-DMA on improved demand outlook
  • Sentiment Highlight: Bitcoin sentiment shows rise in retail short exposure, looking higher

Today the British pound went up, way up. The market began to bring forward the next expected rate hike from the Bank of England from May 2018 to late 2017, which helped to bid up the British Pound and bring a 1.42% pop in GBP/USD. Naturally, a tighter Bank of England that is looking to clamp down the inflation seen despite lower real wages (wage growth minus inflation) brought FTSE and Gilt sellers out. The weaker pound post-Brexit helped to boost exporter’s revenue translation and earnings benefits, which would be limited or erased with a stronger GBP.

After the dust settled, you had banks now looking to the November Bank of England meeting as a possible time for the Bank of England to raise rates. The November meeting will bring a lot of volatility as it is a Super Thursday that brings about an inflation report, economic outlook, and an MPC rate decision. The safer bet when looking at futures markets seems to be February, but central banks like Bank of Canada (Carney’s prior head governor locale) has jumped in front of the market to put a clamp on inflation as the Bank of England is expected to attempt.

US CPI beat on the headline (y/y) and core inflation, which helped to keep the selling front-end treasuries (higher 2Yr yields) in play. The reflation trade that first showed its head in November may begin to take hold again that aligns with higher yields, higher USD, and a presumptively tighter monetary policy talking Federal Reserve. All in all, the CPI print was not a reason to doubt the Fed, but also not a reason to blindly buy-USD. One reason to point to the discounting of the CPI print is that a majority of the reason for the headline beat was gasoline and shelter pricing, which is being attributed to the temporary though violent hurricane season.

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Crude Oil broke to an intraday high of $50.50/bbl and the 200-DMA on Thursday. The question becomes whether or not Bulls can hold the market above $50 and potentially stretch it higher. There was a large drop in managed money net longs from February to August, and a reloading could continue to lift Crude. Despite a discouraging EIA report on Wednesday, the longer-term fundamental outlook improved after OPEC and the IEA showed a strong jump in the growth outlook over the coming two years that may show the rebalance efforts are working. In the end, the price is the ultimate arbiter of opinion, and a continual hold above $45.38 would argue that a higher median toward $50/bbl could be in play.

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FX Closing Bell Top Chart: Crude Oil broke out above the $50-mark and 200-DMA

Chart Created by Tyler Yell, CMT

Next Week’s Main Event: USD Advance Retail Sales (AUG)

IG Client Sentiment Highlight:Bitcoin sentiment shows rise in retail short exposure, looking higher

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

Bitcoin (USD): Retail trader data shows 65.1% of traders are net-long with the ratio of traders long to short at 1.87 to 1. The number of traders net-long is 6.6% lower than yesterday and 9.9% lower from last week, while the number of traders net-short is 8.2% higher than yesterday and 24.5% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Bitcoin (USD) prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Bitcoin (USD) price trend may soon reverse higher despite the fact traders remain net-long (emphasis added.)

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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