Sterling, GBP/USD Analysis:
- UK set to implement “Plan B” in attempt to control new Covid infections
- GBP/USD tests major zone of support with further losses insight if broken
- Massive divergence between institutional and retail sentiment suggests continued Sterling sell-off
“Plan B” Weighs on Under-Performing Pound Sterling
The Pound Sterling has been on a rather choppy decline since printing the 2021 high in early June but has seen a sharper, more concerted drop since the November 4th Bank of England (BoE) decision to keep interest rates unchanged. In hindsight, considering the emergence of the Omicron variant, the decision to hold rates looks like the right one as the UK looks set to implement enhanced measures to combat increasing Covid infections, known as “Plan B”, next week.
The enhanced precautions will certainly impact the UK economy in one of the busiest periods of the year as those working in industries most affected (entertainment, retail and restaurants etc) can no longer rely on government support via the furlough scheme which ended on September 30th. However, the British Health Secretary Sajid Javid mentioned that support of those affected will be kept under review.
Speculative Bets Against Pound Sterling Gain Traction
According to the latest Commitment of Traders report (CoT) speculative institutions including hedge funds and large traders have increased their Sterling shorts, which suggests that a recovery is still somewhat down the line and only adds to the current bearish posture of the Pound.
Analysis insight: The CoT report is often compared to retail client sentiment (IG client sentiment) to help get a better picture of future price action. For more information on this approach take a look at what is the CoT report? and how to use the CoT report in forex trading.
Chart prepared by Richard Snow, Refinitiv, CFTC CoT Report
GBP/USD Key Technical Levels
GBP/USD has breached a very important zone of support (1.3200- 1.3280) with further bearish momentum likely to see a daily close beneath this zone. Confirmation of such a move does not look bode well for Sterling as there is very little by way of significant levels holding it up before the psychological 1.3000 level.
A short term pullback would need to strengthen above the support zone however, this may simply entice sellers back into the market. A real signal of bullish intent would need to be analyzed should we start to trade above 1.3515 which is rather far from current levels.
GBP/USD Daily chart
Chart prepared by Richard Snow, IG
Massive Divergence Between Institutional and Retail Sentiment
Institutional/speculative GBP shorts have shot up while retail sentiment is extremely long. Traditionally, retail traders, as a collective, attempt to call bottoms and tops in strong trending markets, essentially trading against the trend; hence why IG client sentiment can be analyzed as a contrarian indicator. Learn more about how to read and apply IG client sentiment
GBP/USD: Retail trader data shows 75.86% of traders are net-long with the ratio of traders long to short at 3.14 to 1.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.
The number of traders net-long is 2.19% higher than yesterday and 8.59% higher from last week, while the number of traders net-short is 2.95% lower than yesterday and 0.53% lower from last week.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias.
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
Be the first to comment