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GBP/USD: A bad recipe being cooked-up for the bulls

  • It is a bad recipe being cooked up for GBP bulls whee considering CFTC positioning, poor UK data, Brexit and a dovish BoE. 
  • GBP/USD pair is technically bearish and keeps developing below the 23.6% retracement of its latest daily slide.

GBP/USD is trading between a low of 1.2961 and 1.3008, relatively flat on the day at this juncture, in a market for the pound immersed in dovish rhetoric from the Monetary Policy Committee members ahead of the 30th Jan Bank of England interest rate decision as well as mixed sentiment surrounding Brexit trade negotiations. 

GBP CFTC positioning over-stretched 

At the time of writing, GBP/USD sitting at 1.3000 while net longs pile up to 16% of open interest accordion to the week 8-14 January CFTC data, a potentially bearish prospect for the pound, just as we start to see a widespread drop in USD long positions.

"With net longs piling up to 16% of open interest, GBP downside potential may be exacerbated in the coming weeks should negative headline news persist, not least on a possible rate cut or on the UK/EU trade negotiations," analysts at ING Bank argued. 

Brexit back in focus

As for Brexit, following a Parliament end of year recess, news feeds are concentrated again and are starting to dish out mixed messages to keep sterling traders on high alert. 
At the start of the week, we witnessed a bearish opening gap following a report doing the rounds quoting the UK's Finacial Minister pessimism for Brexit negotiations and an adverse effect on UK businesses. Sajid Javid has admitted businesses will be hit by Brexit as he fired off a warning to manufacturers that "there will be no alignment" with EU rules. More on that here

BoE meeting 30th Jan critical for sterling's lifeline 

We have seen mixed data of late from the UK  economy as we head towards the BoE meeting at the end of the month.  Crucially, the inflation data for the UK for December remains weak. The 12-month Consumer Price Index was seen easing to 1.3% and core inflation falling to 1.4% YoY. "Both are at their lowest level since late 2016 prompting calls for the BoE to cut the official cash rate," analysts at ANZ Bank argued, adding, "Sterling is treading water ahead of next week’s BoE meeting and the UK’s 31 January departure from the EU. Clarification on the UK’s negotiation priorities is needed to give GBP direction."

Additionally, the fact that services inflation is easing suggests the economy is slowing, as warned by analysts at RBS Economics. "The BoE’s MPC are sharpening their interest rate cutting spears. A cut on 30th January looks a distinct possibility. Financial markets certainly think so."

Moreover, the UK's Gross Domestic Product contracted by 0.3% last November and the latest retail sales were also exceptionally weak for December and given that consumers were the main contributors to UK economic growth last year, December’s slump is especially disappointing. All in all, a bad recipe for GBP bulls.

GBP/USD levels

  • GBP/USD Forecast: Brexit and BOE weighing on Sterling

Valeria Bednarik, the Chief analyst at FXStret, explained that the GBP/USD pair is technically bearish:

"It keeps developing below the 23.6% retracement of its latest daily slide. Furthermore, the 4-hour chart shows that it spent the day below all of its moving averages, which lack directional strength, while technical indicators remain within negative levels, although without clear directional strength. The risk of additional slides will increase on renewed that sends the pair below 1.2965."

 

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