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How We're Trading UK's Surprise Rate Hike

June 22, 2023
Frank Cabibi

This morning's BoE decision took investors by surprise when rates changed by more than expected. News of the aggressive hike caused a stir in the pound pairs as the UK's dealing with sticky price inflation. The BoE delivered a statement that brought the GBP bulls back.

EdgeFinder Analysis

EURCAD is the strongest sell on the EdgeFinder at -5. The CAD takes EUR on all fronts except COT data, which is nearly the complete opposite from the smart money side. Although retail stays long, price has declined over 4.5% since the highs of May.

Smart money does favor the euro over the loonie right now, but weekly activity may be suggesting yet another shift in COT sentiment. Even though these moves take a long time to fulfill, it's important to spot the trend early.

GBPNZD has come down to some support on the 4H around a rising trend line. If price can hold at this level, the pair may likely take another shot at resistance around 2.07168. Additional support lies below current price at the previous bounce off the line under 2.04. We could also watch for a break at the double top for a continuation of the uptrend.

GBP and NZD make a great pair due to the opposing stances of their central banks. The RBNZ does not want to keep hiking rates as it sits at 5.5%. Meanwhile, the struggling UK needs to keep interest rates higher to battle sticky inflation.

GBPJPY could be the most promising of the pound pairs as these two central banks are starch opposites. Governor Bailey of the BoE remained incredibly hawkish towards monetary policy, stating that they must get stubborn prices down before they even think about pausing.

On the historical backtest feature, we can see a potential shift in EdgeFinder sentiment from what used to be strong sell readings. Now the scanner has a different bias, and the yen is currently the least desired currency. After the BoE meeting, it appears likely that the pound will become more in demand.

Retail Sentiment

Retail positioning tells us all what we need to know. The crowd is mostly anti-GBP while favoring JPY. Retail could be looking for a reversal play on any one of these yen pairs that are shooting higher and higher. If we were to take a look at the smart money chart, things will likely be different.

Smart Money Tracker

Something that you won't see from the retail side is a favored pound and neglected yen. You would need to scroll to see the yen at the bottom of the table. The bottom chart shows the smart money bias based on net positions to the long side.

Fundamental Spotlight

If we were to look at the latest seasonality data, however, it might give the bulls a second opinion. June's historical performance is not bullish on the 5 and 10 year averages. Actually, the next three months do not look bullish for the pair, according to historical performance.

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