Analysts at Citi FX have underscored a dovish shift in the recent remarks from the Bank of England (BoE), leading to a diminished value of the British Pound (GBP) at the beginning of the week. BoE officials Bailey and Ramsden’s comments last week implied an anticipated significant drop in the Consumer Price Index (CPI) for the upcoming month, with broader risks to the UK’s inflation outlook leaning towards the downside.
This dovish sentiment has prompted a reassessment of the BoE’s stance, reflected in recently disclosed figures, and has contributed to the GBP’s underperformance, particularly against the US Dollar (USD). Historical trends suggest that following such a recalibration event, the GBP typically experiences further depreciation over the subsequent 5-10 days. This depreciation tends to be more pronounced against the USD compared to the Euro (EUR), attributed to concurrent USD strength and more favorable inflation dynamics in Europe.
The current weakness in GBP is notable as it stems from BoE commentary rather than concrete data. With no fresh inflation data expected until after the May BoE meeting, the central bank’s communication is poised to wield significant influence. Citi analysts caution that dovish remarks from BoE’s Chief Economist Huw Pill could intensify selling pressure on the GBP. Furthermore, Citi predicts that forthcoming UK Purchasing Managers’ Index (PMI) data might fall below expectations, potentially reinforcing the bearish sentiment surrounding the GBP.
In contemplating the optimal strategy to capitalize on the potential decline in GBP, Citi suggests the situation is multifaceted. An interruption in the recent USD rally is anticipated tactically, given a lighter schedule of US events and expectations for the core Personal Consumption Expenditures (PCE) price index to come in below the Federal Reserve’s projection. In the Euro Area, although PMIs are forecasted to lag, technical analysis points to a bullish scenario if the EUR can surpass a critical resistance level.
Should USD strength pause and geopolitical tensions remain stable, Citi identifies opportunities in higher beta foreign exchange (FX) pairs. For example, the GBP could weaken against the New Zealand Dollar (NZD) or the Australian Dollar (AUD), where leveraged positions are already short, and robust Australian CPI figures are expected for the first quarter.