Investors Most Bullish on Pound Sterling Since 2021

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Sentiment towards the British Pound continues to improve with the Commitments of Traders (COT) report showing investors are the most bullish since 2021.

The COT report is the largest and most widely followed report into market positioning and shows a year-long trend of improved sentiment towards Pound Sterling from deeply negative territory.

It shows the net long position in Sterling now stands at a net positive of 12,593 contracts, up from 4,528 the previous week and marking a significant rise on the one-year low of net negative -80,372.

"Net GBP speculators' positions surged higher and have now been positive for five consecutive weeks, marking a notable improvement in sentiment relative to the start of the year. This reflects a recent slew of less bad UK economic data which led to an upgrade of the BoE's UK GDP and inflation forecasts at its May policy meeting," says Jane Foley, Senior FX Strategist at Rabobank.

"Hedge funds turned more bullish in the pound last week, raising their long positions to 5% of Open Interest, the highest since November 2021," says Kenneth Broux, an analyst at Société Générale.

The improved sentiment towards Sterling marries with the UK currency's outperformance which means it is 2023's top-performing currency.

The GBPUSD exchange rate has risen from a low of 1.0356 on September 26 to trade at 1.2441 at the time of writing. The GBPEUR exchange rate has risen from a low of 1.0843, also reached on September 26, to trade back at 1.15.

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Although improving, the overall net position on the Pound remains relatively neutral as the long position can by no means be described as stretched, suggesting it faces two-way risks going forward.

The same can't be said about the Euro where the net positive position continues to march higher amidst investor relief that a major gas crisis was avoided this winter, allowing the economy to recover strongly.

The ongoing rise in European Central Bank interest rates has meanwhile improved the attractiveness of monetary assets in the Eurozone, prompting a net inflow of investor capital.

But the positive positioning in the Euro is now reaching extended levels, leaving the single currency prone to sharp short-term positioning-driven pullbacks.

"Net EUR long positions continued to move higher having already reached their highest levels since September 2020 the previous week. Hawkish commentary from ECB officials remains prevalent. That said, in the spot market, the EUR drifted lower vs. the USD last week and was the worst performing G10 currency in the first half of May," says Foley.