The Bank of England was one of the first major banks to increase interest rates in order to deal with surging inflation. With inflation at 9% y/y the early action was clearly justified. The last central bank meeting saw a dovish hike. The bottom line was that the BoE expect inflation to peak at 10%, but growth to turn negative in 2023. This was the perfect stagflation picture of slowing growth and high inflation. The Bank of England may even find itself cutting interest rates in 2023 at this rate.

PM Johnson sends an ominous warning

At the end of May, PM Johnson said that the UK economy is facing a difficult period ahead. On top of the PM Johnson is also potentially facing a confidence crisis in his leadership after the Sue Gray report showed the PM at the heart of some of the COVID restrictions being broken.

Yet the BoE is expected to hike in June

The short-term interest rate markets are pricing in a 100% chance of a 25bps rate hike on June 16. Why? Simply because the BoE needs to control inflation at the risk of slowing growth. So, the BoE may need to hike again after this and then perhaps hit the pause button to see where the UK economy is at.

Sentiment & positioning for the GBP

So the sentiment for the GBP is now sliding to the bearish side. The positioning from the COT report is also more to the bearish side with aggregate positioning both below the mean and more than 1 standard deviation lower. Here is the Financial Source COT report below showing that:

EURGBP upside bias

This means there is not really a very clear macro bias for the GBP right now. However, EURGBP dip buyers still make sense as the ECB is having to turn more aggressive on hiking rates in order to control a surge in eurozone inflation. Any dip deeps lower in the EURGBP should find those medium-term dip buyers stepping back in.