GBP/USD on edge as bearish bets on British pound hit highest level this year

The GBP/USD pair is at a critical level as bearish bets on the British pound rise. The pair ended the week at 1.2500, which is an important psychological and support level.

Investors are increasingly bearish on British pound

Most investors and hedge fund managers have turned bearish against the sterling, according to the latest data by the CFTC. The data showed that the net positioning of “non-commercial” participants in the futures market dropped to 6.7k in the previous week. This was higher than the previous’ week’s decline of 1.4k and the highest it has been this year.

The increased level of bearishness in the British pound comes at a time when the currency has done relatively well. In the past month, the pound index has soared by more than 0.88% while the dollar index has declined by 40 basis points.

The British pound is not the only currency under pressure. After the spectacular rally last month, most hedge funds, individual traders, and other money managers have increased their bearish bets on the Australian dollar. These bets increased to 37.7k from the previous week’s 34.8k. The same was the story in the New Zealand dollar, and the Canadian dollar, whose bearish bets rose to 13.8k and 29.0k respectively.

Brexit and coronavirus

Brexit and coronavirus are the biggest risks to the UK economy and the British pound. On Brexit, there are critical differences between the European Union and the UK on the future relationship. Also, there is a key challenge on the timeline for a deal.

Boris Johnson has insisted that his government will not seek an extension to the transition period. According to the transition document, he has until June 31 to ask for this extension. As a result, there is a likelihood that the two sides will not have a deal before the December deadline.

Analysts and the European Union believe that a deal of this size requires several years to be hammered. This is made worse by the hard positions from the two sides. For example, last week, Johnson asked the EU to back down on issues about fisheries, environmental protection, labour laws, and legal issues. In the previous week, Michel Barnier lamented of the disappointing progress, saying that the EU had “refused to engage seriously on a number of fundamental issues.”

Meanwhile, the country is feeling the impact of the coronavirus pandemic .The manufacturing and services PMI has declined to the lowest level on record. The unemployment situation is getting worse, with seven out of ten companies expected to furlough employees. Some analysts expect the unemployment rate to rise to 10% from the previous 3.9%. Additionally, the government has suspended the housing market and more companies are struggling.

BOE decision eyed

The biggest news relating to the British pound will probably be the Bank of England (BOE), which will deliver its rates decision on Thursday.

Analysts polled by Bloomberg expect the bank to leave rates unchanged as the ECBand Federal Reservedid last week. However, most of them see the bank announcing additional quantitative easing. Those at Citigroup expect the bank to add £200 billion of QE in this meeting. This will be in addition to the £200 billion that was announced in the emergency meeting in March. The bank has already bought £70 billion of these assets. An analyst at Citi told the FT:

“Without further QE, the price-sensitive private market would likely require significantly higher yields to absorb issuance. The BoE is unlikely to test this in the middle of a crisis.”

GBP/USD technical outlook

Looking at the four-hour chart, we see that the GBP/USD pair hit an important resistance level at 1.2653 on Friday. This was the highest level since April 14. Also, we see that the pair settled at 1.2500, which is not only an important psychological level but also important support. It is also along the diagonal support shown in blue and along the 61.8% Fibonacci retracement level.

As such, a break below this support will likely see bears attempt to test the 50% retracement at 1.2300.