UniCredit Close GBP/USD Trade as Bonfire of the Sterling Shorts Burns Bright

Unicredit have exited a trade designed to profit on the decline in the Pound to Dollar exchange rate citing the UK currency's unexpected recent strength.

The British Pound is misbehaving from the perspective of the army of traders out there who have been betting against it since the UK voted to leave the European Union.

To be sure, the fall from pre-referendum levels of 1.50 down to the lows at 1.28 will have netted many a tidy profit.

However, the move from the lows sub-1.30 to the current 1.40's will be seeing many exiting the trade on the concern the trend lower has stalled.

Better-than-expected Manufacturing, Construction and Services PMI data for August reduced concerns about the negative impact of Brexit and allowed Pound Sterling to edge higher.

UniCredit Exit their GBP/USD Short

One big-name that has sought exit this market is UniCredit whose strategists have acknowledged the weakness they were expecting is unlikely to materialise.

“Risks to our call for stagnation in UK growth in 3Q16 are now skewed to the upside given the recent string of better-than-expected UK data releases – not least today’s services PMI,” says UniCredit's Dr. Vasileios Gkionakis.

Gkionakis says that while it is still “early days” for the UK economy and a downturn could materialise it is simply taking to long and allowing GBP to appreciate accordingly.

Secondly, they cite the "Large sterling shorts" in the market - this is where so many traders are betting in one direction the move stalls as there are no fresh market entrants to ensure the move extends.  

Finally, is what UniCredit call the "USD factor" - this is that following Friday’s employment report, they expect the market to “reduce the odds” of the Federal Reserve raising rates in September, with the result that this  should be USD-negative across the board, “hence providing near-term support to GBP/USD.”

"We have decided to reduce risk tactically by closing our short GBP position against the USD (50%) at 1.3302 with a small loss of 0.10%. We still keep our EUR/GBP position open (50%, opened on 4 July at 0.8394)," says Gkionakis.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3336▲ + 0.07% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2882 - 1.2936
**Independent Specialist	1.3149 - 1.3202 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Bonfire of Sterling Shorts Aids Exchange Rates Higher

A phenomenon called 'short-covering' has widely been cited for much of the GBP's recent advance.

This is the process whereby traders who have been profiting from betting on a currency's decline suddenly find themselves in a rising market.

UniCredit are a perfect example.

To avoid their profits being cut they close their position by buying Sterling, this in turn accelerates the counter-trend move.

Sometimes the move can resemble a panic-attack.

What can make this phenomenon even worse is when a record high volume of traders are short, since it adds fuel to the rally, as is the case with Serling.

Below is a picture from the recent commitment of traders (COT) report which shows the number of short positions held by speculators and hedge funds on the Pound.

Note how high the volume is on these shorts recently (far right). The blue bars show net short positions. I have circled in red the high volumes of short positions in recent weeks – they are at record levels.  

"The recent string of positive UK data surprises, particularly from PMI survey data, has collided with a market that was and remains highly bearish sterling," says Alvin Tan at Societe Generale..

The resulting squeeze has propelled Sterling up strongly over the past week.

Soc Gen's technical analysts see strong resistance at GBP/USD 1.3540/1.3580, and support at EUR/GBP 0.83/0.8250.