Sell GBPUSD on retracement. Target 1.294

Following to Bank of England MPC member Vlieghe comment on that says he is ready to cut interest rates if data does not improve last week. Odds of a BOE rate cut have doubled since last Friday and that is leading to more pound weakness as we get the week started. The OIS market now sees chances of a rate cut on 30 January at ~46%, up from ~23% at the end of last week.

UK economic data is going to be a key focus in the lead up to the BOE policy meeting this month so make sure to keep an eye on that in the coming weeks. For today, we'll have UK November GDP figures but it should just reaffirm the economic stagnation in Q4 2019.

As for US Dollar, the Fed are currently on hold now and the recent dot plot suggests that there will be no policy changes in 2020.

In order to consider a rise in rates they will need to see a supported uptick in inflation. Keep an eye out for inflation data out on Tuesday this week. The current expectations for the next Fed meeting is that there is seen a 90% probability of no rate change.

Even though there was a US payroll miss in both the headline and wage prints on Friday, the Dollar Index had still made a pretty decent recovery over the week on the improved non-manufacturing PMI and ADP prints in the week. Furthermore, with the optimism of Phase 1 Trade Deal to be signed has benefited the US Dollar this week.

Therefore, with the strong and fresh sentiment surrounding both currencies, I recommend to Sell GBPUSD with target of 1.291 - 1.294.

Comment:

Cable slipped to a session low of 1.2966 from around 1.2990 on the data release but you'd have to figure that more emphasis needs to be put on the fact that the data captures pre-election sentiment - one that is plagued by Brexit and political uncertainty.

Don't get me wrong, I'm not making a case for the pound to retrace higher by any significant margin. There is no doubt that sentiment continues to lean towards the BOE taking easing action and the softer data today vindicates that.

However, I just want to point out that this isn't that big of a game changer as to what any post-election data might suggest in the coming weeks/months.

If we continue to see post-election data allude to more of a slump in the UK economy, then I reckon that would give the BOE more confidence to pull the trigger.

All that said, if inflation data this week and labour market data next week points to added softness, it could very well spur the BOE into taking action at the end of this month.

Odds of a 25 bps rate cut on 30 January now sit at ~50%, more than double the ~23% seen at the end of last week

Comment:

It's been a brutal whipsaw today in the pound after a dismal December retail sales report that showed:

Sales ex fuel +0.7% vs +3.0% expected
Including fuel -0.6% vs +0.6% expected

The prior readings were also revised lower.

The drops pushed the odds of a BOE rate cut this month up to 73% compared to 60% before the data. Intraday, the pound is down almost 100 pips after specs were caught leaning the wrong way into the data.

It's been a wildly disappointing run for the pound and I struggle to see how 1.30 or the Jan low of 1.2954 will stop the momentum lower.