Despite short positions, open positions may trigger a rally.
Abstract
Hedge funds are beginning to wonder if the pound's rally can last longer, after it surprisingly became the best-performing currency in the Group of 10 this year.
Fundamentals
The UK average wage level slowed again in April after an unexpected spike in March. The likelihood of a pause in rate hikes at the June meeting has increased slightly as the Bank of England is giving a lot of weight to this data as well as the next CPI data. The lower price of the short-term pound reflects this.
And the UK inflation data to be released on May 24 will play a decisive role in the Bank of England's next interest rate decision, thus influencing the direction of the pound. If inflation falls significantly and rapidly from now on, as the BoE expects, it may not raise rates further, which would put pressure on the pound.
However, the risk that the BoE will take more action has certainly increased since last week. The BoE raised its key rate by 25 basis points to 4.5% and said its next decision on June 22 will depend on data.
In our view, the BoE is expected to continue to raise rates given that inflation in the U.K. is outpacing inflation in the U.S. and the Eurozone. The rate hike policy may initially attract yield-seeking capital, but it also increases the likelihood of a recession, and any sharp downturn in the economy could lead investors to sell off the pound. And the tightening cycle will hit the U.K. much harder than Europe or the U.S., because in the U.K., where people have less savings and more mortgages, interest rate hikes are really bad for the economy.
Hedge funds are now as bearish on the pound as they have been since December 2021, thanks to concerns about a recession in the U.K.
Data from the Commodity Futures Trading Commission (CFTC) showed that after three consecutive weeks of being long, leveraged investors turned to holding 6,858 contracts of net short positions in the pound in the week ending May 9.
Meanwhile, the International Monetary Fund previously warned that Britain is the only G7 country that could experience a recession this year. There is growing concern that the fight against inflation will come at the expense of the economy.
The pound has performed well before, so profit-taking is also attractive. Bullish bets on Goldman Sachs and Jefferies LLC will be under threat if the pound weakens.
Technical Analysis:
After a brief negative impact from the increased unemployment rate and initial jobless claims, as well as wage levels, the GBP/USD quickly recovered during the early European session. This was driven by the widespread expectation of another interest rate hike by the Bank of England in June, which continued to support the British pound.
The new upward movement, if sustained, would provide an initial signal that a correction is underway from the significant decline since the peak at 1.2679. However, a close above the level of 1.2562 is needed to establish a foundation for further upside recovery.
However, the continued downward movement during the New York session dashed hopes for an upward correction, indicating that more time may be needed for price correction.
On the other hand, considering the downward momentum of the MACD and the negative slope of the RSI, the short-term risk tends to be downside rather than upside. Nonetheless, the currency pair remains well supported near the upward trendline drawn from the record low of 1.2445 in September last year.
In a bullish scenario, if the price closes above the 20-day moving average at 1.2520, the focus will once again be on the key long-term descending trendline near 1.2635. A breakout above this level would likely propel the price higher, surpassing the one-year high at 1.2679.
Overall, after being rejected near the long-term resistance trendline once again, GBP/USD appears to be preparing for a new bearish trend. However, unless the price breaks below the upward trendline at 1.2445 and the 50-day moving average, there may still be another opportunity for a rebound in the currency pair. In terms of trading strategy, buying on dips should be the primary approach.
Trading Recommendation:
Trading Direction: Long
Entry Point: 1.2460
Target Point: 1.2680
Stop Loss Point: 1.2345
Valid Until: 2022-05-30 23:55:00
Support Levels: 1.2518, 1.2472, 1.2444, 1.2402
Resistance Levels: 1.2562, 1.2590, 1.2624, 1.2640
Hedge funds are beginning to wonder if the pound's rally can last longer, after it surprisingly became the best-performing currency in the Group of 10 this year.
Fundamentals
The UK average wage level slowed again in April after an unexpected spike in March. The likelihood of a pause in rate hikes at the June meeting has increased slightly as the Bank of England is giving a lot of weight to this data as well as the next CPI data. The lower price of the short-term pound reflects this.
And the UK inflation data to be released on May 24 will play a decisive role in the Bank of England's next interest rate decision, thus influencing the direction of the pound. If inflation falls significantly and rapidly from now on, as the BoE expects, it may not raise rates further, which would put pressure on the pound.
However, the risk that the BoE will take more action has certainly increased since last week. The BoE raised its key rate by 25 basis points to 4.5% and said its next decision on June 22 will depend on data.
In our view, the BoE is expected to continue to raise rates given that inflation in the U.K. is outpacing inflation in the U.S. and the Eurozone. The rate hike policy may initially attract yield-seeking capital, but it also increases the likelihood of a recession, and any sharp downturn in the economy could lead investors to sell off the pound. And the tightening cycle will hit the U.K. much harder than Europe or the U.S., because in the U.K., where people have less savings and more mortgages, interest rate hikes are really bad for the economy.
Hedge funds are now as bearish on the pound as they have been since December 2021, thanks to concerns about a recession in the U.K.
Data from the Commodity Futures Trading Commission (CFTC) showed that after three consecutive weeks of being long, leveraged investors turned to holding 6,858 contracts of net short positions in the pound in the week ending May 9.
Meanwhile, the International Monetary Fund previously warned that Britain is the only G7 country that could experience a recession this year. There is growing concern that the fight against inflation will come at the expense of the economy.
The pound has performed well before, so profit-taking is also attractive. Bullish bets on Goldman Sachs and Jefferies LLC will be under threat if the pound weakens.
Technical Analysis:
After a brief negative impact from the increased unemployment rate and initial jobless claims, as well as wage levels, the GBP/USD quickly recovered during the early European session. This was driven by the widespread expectation of another interest rate hike by the Bank of England in June, which continued to support the British pound.
The new upward movement, if sustained, would provide an initial signal that a correction is underway from the significant decline since the peak at 1.2679. However, a close above the level of 1.2562 is needed to establish a foundation for further upside recovery.
However, the continued downward movement during the New York session dashed hopes for an upward correction, indicating that more time may be needed for price correction.
On the other hand, considering the downward momentum of the MACD and the negative slope of the RSI, the short-term risk tends to be downside rather than upside. Nonetheless, the currency pair remains well supported near the upward trendline drawn from the record low of 1.2445 in September last year.
In a bullish scenario, if the price closes above the 20-day moving average at 1.2520, the focus will once again be on the key long-term descending trendline near 1.2635. A breakout above this level would likely propel the price higher, surpassing the one-year high at 1.2679.
Overall, after being rejected near the long-term resistance trendline once again, GBP/USD appears to be preparing for a new bearish trend. However, unless the price breaks below the upward trendline at 1.2445 and the 50-day moving average, there may still be another opportunity for a rebound in the currency pair. In terms of trading strategy, buying on dips should be the primary approach.
Trading Recommendation:
Trading Direction: Long
Entry Point: 1.2460
Target Point: 1.2680
Stop Loss Point: 1.2345
Valid Until: 2022-05-30 23:55:00
Support Levels: 1.2518, 1.2472, 1.2444, 1.2402
Resistance Levels: 1.2562, 1.2590, 1.2624, 1.2640