We are now most focused on the USD and GBP for relative value opportunities.
Rates markets have been persistently unwilling to increase pricing
for Fed hikes since June, despite a fairly steady stream of hawkish
comments from officials and strong labour market data. Our economics
team continues to expect a rate hike in September, implying an
adjustment higher in Fed pricing is likely in the weeks ahead. The Bank
of England has had a run of upside surprises on key releases for August,
and, as a result, the markets have scaled back expectations for further
easing. Our economists expect data to be less robust going forward and
still believes as its base-case scenario that the Bank is likely to
deliver a further 15bp of rate cuts in November.
Market positioning has adjusted to reflect the shift in rate hike expectations for the BOE and the Fed, with
cable short positioning recovering sharply from an extreme short
position in July to only a modestly short position now. The short
covering process could have further to run in the near term, but the lightening of positions should ultimately create opportunities for shorts.
Short GBPUSD is likely to be an attractive trade again as we move into autumn.