Citi FX analysts have highlighted a dovish shift in the Bank of England’s (BoE) recent remarks, contributing to a weaker British Pound (GBP) at the week’s commencement.
Comments from BoE officials Bailey and Ramsden last week suggested a substantial drop in the Consumer Price Index (CPI) for the upcoming month, with broader risks to the UK inflation outlook leaning towards the downside. This dovish sentiment has initiated a repricing of the BoE’s stance, as depicted in recently released figures, and has contributed to the GBP’s underperformance, particularly against the US Dollar (USD).
Historical patterns indicate that the GBP tends to depreciate further in the 5-10 days following such a repricing event. The depreciation is typically more pronounced against the USD than the Euro (EUR), attributed to concurrent USD strength and more favorable inflation developments in Europe.
The current GBP weakness is unique as it stems from BoE commentary rather than hard data. With no new inflation data expected until after the May BoE meeting, the central bank’s communication is poised to play a crucial role. Citi analysts warn that dovish remarks from the BoE’s Chief Economist Huw Pill could exacerbate the selling pressure on the GBP.
Additionally, Citi forecasts that upcoming UK Purchasing Managers’ Index (PMI) data may fall short of expectations, potentially reinforcing the bearish narrative for the GBP.
While considering the best strategy to capitalize on the GBP’s potential decline, Citi suggests that the situation is complex. A tactical pause in the recent USD rally is anticipated, considering 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 forecast.
In the Euro Area, although PMIs are expected to underperform, technical analysis suggests a bullish scenario if the EUR can close above a key resistance level.
If USD strength pauses and geopolitical tensions do not escalate, Citi sees opportunities in higher beta foreign exchange (FX) pairs. For instance, the GBP could weaken against the New Zealand Dollar (NZD) or the Australian Dollar (AUD), where leveraged positions are already short, and a strong Australian CPI is anticipated for the first quarter.
