• Expectations are growing that the BoE will start cutting rates this week.
• GBP/USD may have already put in its medium-term high.

The Bank of England will release its latest monetary policy report this week with financial markets now seeing a 60%+ chance that the BoE will start cutting interest rates on Thursday at noon UK. At the June meeting the decision to keep rates unchanged was seen as ‘finely balanced’ while annual inflation fell to 2% in May, hitting the central bank’s target. UK services inflation remained elevated at 5.7% - down from 6% in March - but this strength ‘in part reflected prices that are index-linked or regulated, which are typically changed only annually, and volatile components’, according to the MPC. If the UK Bank Rate is not cut this week, the market has fully priced in a cut at the September 19 meeting.

The hardening of rate cut expectations can be seen in short-dated UK borrowing costs, with the yield on the 2-year Gilt falling steadily since early June to its lowest level in 14 months.

UK 2-Year Gilt Daily Gilt Yield

GBP/ USD touched a one-year high of 1.3045 in mid-July, driven by a renewed bout of US dollar weakness. Since then, GBP/USD has given back around two cents on lower bond yields and rising rate cut expectations. The US Federal Reserve will announce its latest monetary policy settings this week, one day before the BoE, with markets only assigning a 4% chance that the Fed will cut rates. If this plays out, GBP/USD is unlikely to see 1.3000 in the coming weeks. A UK rate cut and a US hold will see the 1.2750 area come under short-term pressure, followed by 1.2667 and the 38.2% Fibonacci retracement area at 1.2626.

GBP/USD Daily Price Chart

Retail trader data shows 42.09% of traders are net-long with the ratio of traders short to long at 1.38 to 1.The number of traders net-long is 10.30% higher than yesterday and 1.57% lower than last week, while the number of traders net-short is 7.86% lower than yesterday and 19.09% lower than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net short.

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