Goldman Sachs on GBP ahead of BOE monetary policy decision

Goldman Sachs Macro Markets Strategy Team publishes a note on the GBP outlook in the lead upto the BOE monetary policy decision due later today.

Key Quotes:

“There is no doubt that the build-up in speculative short positioning ahead of tomorrow's Bank of England meeting increases event risk into the meeting.” 

“But - especially in the case of the Pound after the Brexit vote - it is important to look at the bigger picture, which is that FX positioning can be a momentum or a contrarian signal.” 

“Today's we updates those estimates and finds that stretched short speculative positioning in both cases still has a momentum signal, meaning that it tends to signal further weakening in these currencies versus the Dollar.” 

“On a four-week horizon our estimates put further GBP/$ downside at -1.0 percent, while on an eight-week horizon they put downside (cumulatively) at -2.4 percent, an estimate that is statistically different from zero.”

“If the BoE stands pat, they expect dovish dissents from two MPC members and the minutes to be "exceptionally" dovish, essentially pre-announcing a rate cut and QE (leaning towards credit easing) for the August 4 meeting.”

“As such, we see the momentum signal dominating short-term event risk into tomorrow, in line with our 3-month GBP/$ forecast of 1.20.”