GBP/USD pushes into upper 1.3500s as sterling remains buoyant on eve of BoE policy announcement

• One day out from an anticipated second successive BoE rate hike, pound sterling has been trading on the front foot.
• GBP/USD recently surpassed its 21DMA at 1.3557 before running into resistance ahead of the 1.3600 level
• The pair wasn’t much moved by the latest weak US ADP figures, with USD traders more focused on wage growth.

One day out from an anticipated second successive BoE rate hike, pound sterling has been trading on the front foot, with GBP/USD recently surpassing its 21-day moving average at 1.3557 before running into resistance ahead of the 1.3600 level. At current levels in the 1.3560s, the pair trades with on-the-day gains of about 0.3%, taking its on-the-week gains to about 1.3% and the rebound from last week’s sub-1.3400 lows to roughly 1.5%. While hawkish BoE bets ahead of Thursday’s meeting are one factor supporting GBP/USD on Wednesday, with the latest BRC Shop Price inflation figures jumping to near-decade highs and adding to inflation fears, dollar factors are also in play.

Market commentators are citing a combination of 1) a paring back of long positions and 2) a paring back on hawkish Fed bets following recent policymaker communications as the major driver of recent US dollar weakness. Regarding positioning; MUFG noted on Wednesday that their 2yr z-score measure of Leveraged Funds’ long USD positioning is “at an extreme”, with USD longs at a level not seen since 2011. However, ING says that “if position-squaring is indeed behind this week’s dollar weakness… we expect the dollar’s positioning now to have reached a somewhat more balanced level which can allow for some stabilisation,” the bank says. “After all”, they continue, “a market that is quite freely speculating on the pace and size of Fed tightening is unlikely to turn much less bullish on the dollar anytime soon”.

Regarding recent Fed speak, policymakers played down the prospect of a 50bps rate hike in March. Meanwhile, though policymakers speaking this week have unanimously expressed support for the start of a rate hiking cycle next month, most emphasised a data-dependent approach when it comes to determining its timing, pace and extent. That implies that US economic data in the coming months will take on even more important than usual, starting with this Friday’s official January labour market report. The latest weak ADP national employment change figures have solidified expectations for a weak headline NFP number but didn’t impact FX markets or GBP/USD too much given Fed members have said they are more focused on wage growth.