Pound weakness eases as accumulated positioning unfolds

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Discussion points:

  • Accumulated hawkish expectations cause sterling to sell off as sentiment stagnates
  • Key EUR / GBP and GBP / USD levels to watch

EUR / GBP is trading at a two-month high, with the pound posting its worst performance against the euro since April. The pound has clearly underperformed this week as positioning for a hawkish BOE caused the position to relax on risk aversion sentiment. Movements also intensified in GBP / USD as the US dollar jumped more than 1.2% this week to its highest level in a year.

Central bank expectations have become a central currency market target as the unwinding of the pandemic-induced stimulus measures begins, with rate hike expectations the main driver of positioning. Last week’s FOMC meeting was a key selling point for USD bulls, as messages suggested the central bank was ready to start cutting its bond buying program in November, the chart shows. of updated points suggesting that a rate hike could occur by the end of 2022, which was more hawkish than markets expected, causing the dollar to rise and a shifting positioning against pairs that valued more hawkishness on the part of their central banks, such as the pound sterling and the New Zealand dollar.

As mentioned by Justin, the pound was positioned to be disappointed with a 15 basis point rate hike scheduled for February 2022 at a time when the data is likely to worsen slightly. The end of the holiday scheme this week is likely to see unemployment rise, but the Bank of England will want to see the extent of the impact on the labor market before taking action, which doesn’t leave much room for maneuver without disappointing hawkish expectations. There is also likely to be a drop in sentiment-based data due to ongoing bottlenecks and Brexit brakes.

The pound is likely to remain sensitive to upcoming data releases as the unwinding of positioning continues, but it is difficult to envision further downward pressure in the near term as oversold conditions make it less attractive to attract further shorts. . GBP / USD found good support around 1.34 with RSI breaking through the 30 mark shortly, so I would expect the downward pressure to stop for now as a new direction is determined. A rebound above 23.6% Fibonacci to 1.3577 should see some follow up above 1.3720, but we might see sideways trading before another move is reached.

In EUR / GBP the bullish movement has started to reverse, but we might see a continuation of the pursuit if the pair holds above 0.86 throughout the day. Its 200 day SMA (0.8644) is ahead and is the main resistance going forward, so a weekly close above this level would be a good bullish signal for a new 5 month high above 0.87.

GBP / USD Daily chart

EUR / GBP Daily chart

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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