“Super Thursday” was a disappointment for GBP bulls. Sterling was a notable G10 underperformer last week after the BoE MPC indicated a high degree of uncertainty regarding the economic outlook and appropriate timing of rate rises, encouraging the cautious GBP view of gradual outperformance against the EUR but material depreciation against the USD. Sterling fell to a three-week low against the USD on Friday, on track for its biggest weekly loss against the dollar since late May, as expectations of an interest rate hike by the Bank of England were pushed back to the first quarter of 2016.Minutes on Thursday showed just one policymaker voted for higher interest rates at the BoE’s August meeting. Many in the market had speculated that at least two members of the bank’s policy committee would vote for a hike. The MPC is likely becoming uncomfortable with the persistent sterling strength (GBP is almost 10% overvalued on a REER basis), and with the Bank Rate close to the effective lower bound, a much weaker currency has likely become necessary for the Bank to achieve its inflation target. Furthermore, the relatively dovish BoE tone sits in stark contrast to the Fed’s recent adjustment of the text of its July statement to highlight the strength of incoming US data. Markets have ramped up expectations on BoE rate hikes several times in the past three years and were disappointed. Nevertheless, with the U.S. Federal Reserve inching towards a hike in September, investors appear more confident this time that the BoE could follow suit.“With a September rate hike less than 50% priced, we think a continuation of this dynamic should support further divergence in UK-US interest rates and additional GBP/USD depreciation toward our year-end forecast of 1.45”, says Barclays in a trading note to its clients. On the options front, the recent sharp increase in the GBP/USD option skew to historically high levels makes options a cheap way to position for GBP/USD downside. Indeed, GBP/USD three-month 25-delta risk-reversals, normalized by three-month implied volatility, suggest that GBP/USD puts are approaching their deepest discount versus calls based on data since 2010.GBP/USD is currently trading at 1.5470 after failures at 1.5507. Bulls still on the sidelines after the BOE disappointment on Thursday. Outlook remains mixed.
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