GBP/USD sinks as short bets on sterling rise to highest level this year

GBP/USD sinks as short bets on sterling rise to highest level this year
  • The GBP/USD pair declined as hedge funds and other speculators increased their bearish bets.
  • The traders are concerned about the Brexit game of chicken and the overall outlook of the UK economy.
  • Analysts expect the retail sales, inflation, and employment data from the UK to disappoint

The GBP/USD pair declined during the Asian session as the market focused on the stalled Brexit talks.

GBP/USD falls
GBP/USD falls as Brexit risks rise

Bearish bets on the pound continue to rise

Hedge funds and other speculators increased their shorts positions on the sterling, according to Commodity Futures Trading Commission (CFTC). The numbers showed that these participants increased their short positions to more than 13,000 in the previous week. This was higher than the previous week’s 6.7k and the highest it has been this year.

Futures trading forms a small part of the $5 trillion a day forex market, but this data provides important insights into investor sentiment.

The British pound index, which measures the performance of the sterling against a basket of currencies, has declined by more than 3 per cent in the past month. The GBP/USD declined by 0.10 percent while the EUR/GBP and AUD/GBP rose by 0.10 per cent and 0.20 per cent respectively.

Brexit the key concern

Most traders and investors are mostly worried about Brexit. Last week, the Brexit talks ended without a deal as the two sides traded accusations. In a statement, Michel Barnier, the Chief EU negotiator blamed the UK of insincerity in the talks. He said:

“The United Kingdom did not engage in a real discussion on the question of the level playing field – those economic and commercial “fair play” rules that we agreed to, with Boris Johnson, in the Political Declaration.”

In his statement, David Frost, the Chief UK negotiator said:

“The major obstacle to this is the EU’s insistence on including a set of novel and balanced proposals on the so-called “level playing field” which would bind this country to EU laws or standards.”

Michael Gove, the UK Cabinet Office minister, provided a summary on the key issues hindering a deal. In an interview with Andrew Marr, he said:

“The European Commission want us to follow the rules even though we’ve left the club and the European Commission want to have the same access to our fish when we were in the EU even though we’re out.”

Meanwhile, most gamblers have increased their odds that the two sides will not extend the transition period after January 1 2021. Boris Johnson has until June 30 to request for an extension.

Gamblers Brexit bets
Most gamblers believe the EU and UK will not extend transition

Looking ahead, this will be a busy week for the British pound (GBP/USD). We will receive the March employment and car registration data tomorrow and the consumer price index data on Wednesday. Analysts polled by Bloomberg expect the headline CPI rose by 0.8 per cent year on year in April while the core CPI rose by 1.4 per cent in April.

On Thursday, Markit will release the flash manufacturing and service PMI data on Thursday followed by the retail sales on Friday. Analysts expect that the retail sales slumped by 22.2 per cent year on year in April. This will be the worst reading on record.

GBP/USD technical outlook

GBP/USD technical forecast

The GBP/USD pair is trading at 1.2100. On the daily chart, this price is slightly below the 38.2 per cent Fibonacci retracement level and below the 50-day and 100-day EMA. The pair formed a double top pattern last week. It has also moved below the neckline of the head and shoulders pattern. This implies that the pair will likely continue falling as Brexit concerns continue.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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