Pound Sags on Rate Cut Talk

01/14/2020 9:06 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

There is growing backing for the Bank of England to cut rates as the British pound lags, reports Adam Button.

The Bank of England’s monetary policy committee member Gertjan Vlieghe made a surprisingly explicit call for a rate cut on Sunday as policymakers lose patience waiting for economic resurgence. The New Zealand (NZD) and Australian dollars (AUD) are the leaders on Monday while the British pound (GBP) lags. Commodity Futures Trading Commission’s (CFTC) Commitments of Traders (COT) data showed futures traders shifting out of U.S. dollar longs. 

BOE external member Vlieghe said over the weekend the next few monetary policy meetings are absolutely live and that he “really needs to see an imminent and significant improvement in the UK data” or he is going to vote for a cut. The most-recent vote was 7-2 in favor of holding rates steady, as Haskel and Saunders came off the sidelines in favor of a cut. Now Vlieghe says he would join them.
The comments also put a heavy emphasis on a busy UK data calendar this week that began today with disappointing industrial production, before turning to CPI and retail sales later in the week.

On Friday, both U.S. nonfarm payrolls and the wage data in the report were soft. That led to some modest dollar selling and gold strength. Note the yield curve as well as falling long-end yields have pushed the two-year/10-year spread down 10 basis points since the start of the year to 25 basis points.

In contrast, Canadian employment rose 35.2K in December compared to 25.0K expected to cap the best year for jobs in the country since 2007. However, the initial loonie rally stumbled in part because of wage growth at 3.8% compared to 4.2% expected. Some risk aversion also crept in late in the day Friday.

Below is Citi's economic surprise index, highlighting a contrasting performance between the Eurozone and Canada. 

Pound Sags on Rate Cut Talk - Citi Index Eu Us Uk Ca Jan 13 2020 (Chart 1)

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -61K vs -74K prior GBP +17K vs +12K prior JPY -12K vs -25K prior CHF -4K vs -6K prior CAD +26K vs +12K prior AUD -27K vs -38K prior NZD -1K vs -5K prior
The theme in all these changes is fading conviction in U.S. dollar longs. That's been a great trade for most of the past decade but there are new questions with the turn of the calendar in an election year.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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