Oct 31, 2022
VOT Research Desk

Market Insights, Considerations & Analytics

• It trades in a relatively constrained range.
• During this week, the Fed and BoE will guide the cable.

Both the Federal Reserve and the Bank of England continue to struggle with persistently high inflation, so it appears highly likely that they will raise borrowing rates by 75 basis points this week. While both announcements will be closely watched, it will be necessary to carefully analyze the post-decision rhetoric for any indications of the future path of rate increases.

At the December meeting, the Fed’s decision to raise interest rates by 50bps or 75bps is a close 50/50 bet based on current market pricing, and this is the future pricing that must be followed. The market’s growing belief that the Fed may reduce the pace and magnitude of future rate hikes in the coming year to determine whether the economy can withstand sharply higher rates is one factor that has contributed to the recent risk-on move.

The Bank of England will also raise rates sharply this week, with a 98% chance of a 75-basis-point increase. The size of each increase is still up for debate, but the Bank of England will try to keep raising rates in the coming months.

Over the past few weeks, new PM Rishi Sunak and Chancellor Jeremy Hunt have brought down borrowing costs and stabilized the British pound. The BoE’s monetary policy decisions for the remainder of this year and the coming year will also be influenced by the fiscal implications of the UK’s autumn budget, which will be revealed on November 17. Markets anticipate spending reductions or tax increases totaling up to GBP50 billion.

With little reason for traders to open new positions ahead of the two central bank meetings, Cable is currently floundering. Support can be found as low as 1.1420, while resistance can be found around 116.40.Since cable is trading in the middle of this range right now, traders should hold off buying until later in the week.

According to data from TradingView, 51.15 percent of retail traders are net-long, with a ratio of 1.05 to 1.Net-short traders are 4.72 percent higher than yesterday and 8.84 percent higher than last week, while net-long traders are 5.20 percent higher than yesterday and 11.35 percent lower than last week.

We typically view crowd sentiment in a contrarian manner, and the fact that traders are net-long GBP/USD indicates that prices may continue to fall. Positioning is net-longer today than it was yesterday but net-longer this week. We have a further mixed GBP/USD trading bias as a result of current sentiment and recent changes.

GBP/USD

Simple Moving Averages – Daily