The British Pound saw its largest single-week decline in at least 10 years, as increased fears of a prolonged UK economic recession sparked a sharp wave of selling across all GBP pairs. Indeed, this marks the downtrodden UK currency’s seventh consecutive weekly decline against the resurgent US dollar, and few seem willing to try to catch a bottom in the GBPUSD. Yet we believe that extremely bearish GBP sentiment will be exactly what the Sterling needs to finally see short-term relief. Recent CFTC Commitment of Traders data shows that net-GBPUSD shorts are effectively at their most bearish level in history. In our minds, it is clearly only a matter of time before some of these positions unwind and the GBPUSD sees a sharp recovery. Yet the exact timing of such a move will almost certainly depend on short-term fundamental developments out of the UK economy.
British Pound Could Recover on Unwind of Record Short Positions
Fundamental Outlook for British Pound: Bearish
- British Pound Plummets as UK House Prices Drop 10.9 percent
- Yet GBPUSD Could Rally on Forex Futures Sentiment Extreme
- Where do you think the GBPUSD headed? Discuss your opinion with other traders in the Forex Forum.
The British Pound saw its largest single-week decline in at least 10 years, as increased fears of a prolonged UK economic recession sparked a sharp wave of selling across all GBP pairs. Indeed, this marks the downtrodden UK currency’s seventh consecutive weekly decline against the resurgent US dollar, and few seem willing to try to catch a bottom in the GBPUSD. Yet we believe that extremely bearish GBP sentiment will be exactly what the Sterling needs to finally see short-term relief. Recent CFTC Commitment of Traders data shows that net-GBPUSD shorts are effectively at their most bearish level in history. In our minds, it is clearly only a matter of time before some of these positions unwind and the GBPUSD sees a sharp recovery. Yet the exact timing of such a move will almost certainly depend on short-term fundamental developments out of the UK economy.
The upcoming week of UK economic data would not typically be enough to force major volatility in British Pound currency pairs, but extremely bearish forecasts for the future of domestic growth suggest that any positive developments may produce a near-term GBP bounce. Monday’s Producer Price Index data could potentially alter expectations for the future of Bank of England interest rate policy and, by extension, the British Pound. Interest rate traders currently price in an approximate 40 percent chance that the Bank of England will cut rates by 25 basis points at their next policy-setting meeting, but significantly above-forecast PPI inflation could certainly put a damper on expectations for monetary policy easing. Later that day, the NIESR will release their private estimates for UK GDP growth and the British Retail Consortium will report on domestic Retail Sales. Any surprises in either figure could easily force short-term moves in the GBPUSD, and the same can be said for the following trading day’s Industrial Production numbers. Whatever the outcome, the British Pound will likely see another rocky week of trading—especially as GBPUSD 1-week implied volatility trades at exceptionally high levels. - DR
