GBP/USD Price Outlook: Pound on the Back Foot vs the Dollar

[MongiIG]

GBP/USD ANALYSIS

• CoT data shows that institutional sentiment is becoming increasingly short GBP
• GBP/USD appearing vulnerable after UK budget speech

 

The pound has struggled against the dollar since its peak in early June 2021 and has largely been trading within a bearish channel ever since. It is often useful to consider the positioning (sentiment) of large speculators or hedge funds, otherwise known as the ‘smart money’, for a better understanding of the potential trajectory of future moves.

The latest CFTC data from the commitment of traders’ report reveals an increasing divergence of short and long trades as positioning becomes more net-short. This would suggest a view that the pound is becoming more vulnerable to the dollar.

Positioning of Large Speculators, Hedge Funds (CFTC) with GBP/USD Overlay

Source: Commitment of Traders report, CFTC, prepared by Richard Snow

In addition, retail client sentiment (in aggregate) often looks for reversals during strong trends with sentiment heavily opposite to the ‘smart money’. The banner below shows live GBP/USD IG client sentiment.

KEY TECHNICAL LEVELS FOR GBP/USD

Sterling struggled to capitalize on the mid-month reversal which peaked below 1.3300 on the very same day as the UK government’s half yearly budget statement. Since that day, GBP/USD has sold off 170 points with little sign of abating. Continued selling would bring 1.3080 into focus as the nearest level of support, with the psychological level of 1.3000 coinciding with the prior low and the underside of the long-term bearish channel.

In the case that the dollar weakens, to the benefit of the pound, 1.3265 appears as resistance which would bring the pair closer to the mid-point of the channel – a line of interest as it has proven somewhat significant in containing prices or facilitating a reversal.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

MAIN RISK EVENTS FOR THE WEEK AHEAD

Finalized GDP growth rates for both the US and UK are confirmed this week however, the main events remain the US PCE index (the Fed’s preferred measure of inflation) and the US non-farm payroll data.

Fed officials appear the most unified since the start of the pandemic after numerous speaking engagements from both hawkish and more dovish members confirmed the need for 25 bps rate hikes going forward and remaining open to the increasing likelihood of 50bps if needed. This urgency to hike contrasts with the more cautious approach from the BoE although, the BoE is further down the road when it comes to rate hikes, having started in December of last year already. Such sentiment could see continued dollar strength vs the pound.

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--- Written by Richard Snow for DailyFX.com. 28th March 2022