GBPUSD - Hawkish Harping Not Credible

In recent weeks, there has been a dramatic shift in the narrative at one central bank... yes it's our very own Bank of England. They've moved pretty quickly from an "Inflation is transitory" to a much more sinister we're gonna hike and hike fast. 

In fact, money markets have now priced in a BoE rate of 1% by the end of 2022 - for reference that's way higher than the pre-Covid levels and the highest since the financial crisis. 

GBP 1y swap rates have moved fast!

Source: Refinitiv

But for me, the question is, why? Sure, the BoE has taken a bit more of a hawkish stance but I think we have to be real here - the BoE is not going to suffocate the economy. Inflation has been elevated but there is still room for them to say it is transitory. 

When we actually break down where the inflation is coming from, most of it is in energy prices and global supply chain issues - and if the BoE believes a hike would have the power to bring these down, it is being desperately naive. 

Rather, I suspect that we will see one hike in the near-term to take the rate back to a more post-financial crisis "normal" of 0.25%, and from there we might get another hike by end-22 to 0.5%. 

So what's the trade? 

Well looking at GBP over the last few weeks, we've moved pretty far and very fast. 

Source: Refinitiv

And to me, this move is overblown. I suspect the rates situation will calm down as money market traders regain their heads. It would, in my view, be a major mistake for the BoE to try and curtail inflation over which it has no control. So in reality, I expect these money market rates to come back down. In turn, this will lead to a weaker GBP. I'd like to think this would happen over the next 2 months or so, but it could be a longer waiting game - particularly if CPI numbers come in hot over the next couple of readings. 

Nonetheless, GBP looks pretty exhausted at these levels now (as seen in the chart below), and we have a couple of nice technicals marked up. The double-top in GBP looks pretty bearish, then we also have some nice Fibonacci levels to target which are labelled in the chart. Please email me if you would like the charts in a much bigger and clearer form. 

Source: FXPro MT5

TRADE IDEA: SELL GBP-USD at 1.377, TP at 1.368 and 1.363 in extension. SL at 1.385. 

Regular readers will know I don't usually like putting on an outright USD trade, but this time I think it's justified since GBP just looks like it's sat too high. Likewise, with an increasingly hawkish Fed I think the USD side of the equation looks poised for more strength rather than weakness, so on balance this is the trade to go for.