FX Update: Sterling negative spiral intensifies after BoE. FX Update: Sterling negative spiral intensifies after BoE. FX Update: Sterling negative spiral intensifies after BoE.

FX Update: Sterling negative spiral intensifies after BoE.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The news of the day was supposed to be the FOMC shocking us all with the first less-hawkish-than-expected performance in months last night, but the ensuing USD sell-off is already reversing sharply today. Instead, the focus ow shifts to sterling suffering a renewed beating in the wake of the Bank of England meeting today. Even as three dissenters voted for a larger hike, Governor Bailey is against them and the BoE is forecasting a recession starting in Q4. Ouch, sterling, ouch.

FX Trading focus: FOMC reaction fading fast. Bank of England ushers in renewed sterling pounding.

A very brief update today as I hosted an FX webinar today, starting just as the Bank of England decision was announced – find the replay here (scroll down to the “Previous Webinars” section).

The FOMC last night was a significant surprise in that Powell specifically seemed determined to take 75-basis point hikes off the table in specifically forecasting 50-bps hikes for coming meetings. As well, the Fed will only begin to shrink its balance sheet from June 1, only to reach its maximum pace of tightening ($95 billion/month) in three months. The result was a net “easing” relative to expectations, as the risk of a 75-basis point move was priced into June-July meeting expectations. Risk sentiment exploded higher on short covering and the US 2-year rate dropped some 15 basis points as the US dollar backed down sharply. Our view is that the Fed isn’t really in control of what it is eventually going to have to do in order to get ahead of inflation, but of course the market will react at the margin based on positioning and sentiment. Still, it is remarkable that the USD consolidation is reversing so quickly today. Part of that is down to the Bank of England uncorking an ugly economic forecast that is absolutely crushing sentiment in sterling as well as UK rates.

That of course takes us to the Bank of England meeting: three dissented to the decision to hike rates by 25-basis points, wanting a 50-basis point move. Interestingly, two members saw guidance for more hikes as “inappropriate”! In the economic forecasts, the bank is concerned about the “second-biggest drop in living standards since 1964”, sees unemployment rising throughout the forecast window, and a GDP contraction in Q4 and a 2023 GDP growth of -0.25%. The inflation forecast was raised to a blistering 10.25% for this year, but expected to drop to 3.5% in 2023 (!!). Governor Bailey said in the press conference that rate increases larger than 25 basis points are inappropriate, but I am more afraid that a vicious negative spiral in sterling could force the BoE to do more hiking than it wants to defend the currency and throw the economy under the bus. Finally, rather than starting “active QT” now (selling holdings outright rather than merely not replacing maturing bonds) as had been forecast once the BoE rate reached 1.00%, the bank now says it will not start doing so until August. This is almost an outright reneging on former guidance and is adding further to the pressure on sterling. Helmets on sterling traders – not sure that long term support at 1.2000 in GBPUSD is worth much if the USD is coming back full bore here – also note EURGBP thoughts below.

We focus on EURGBP here rather than GBPUSD because this is the a major technical break in the important measure of sterling’s relative strength. The brutal move higher could signal a move back into the heart of the pre-Brexit range, with resistance into the 0.8800+ area.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Watching for a massive downdraft in GBP trend readings in coming days. Note the USD weakness on the back of the FOMC is fading fast….

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
URGBP has triggered in a massive way to the upside on the chart – watching for follow through in the coming days. The AUDJPY is an interesting one to watch for the status after trying to move above resistance near 93.50, just as the CNHJPY status bears close watching.

Source: Bloomberg and Saxo Group

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.