Markets Hold Largest Bets Against British Pound Since 2013, Euro and US Dollar to Remain Favoured

A strong start for Sterling on Tuesday the 18th October but we note foreign exchange markets continue to bet heavily against the UK currency which leaves it at risk of further weakness.

• Pound to Dollar exchange rate today: 1 GBP = 1.22233 USD, 24 hour best rate: 1.2274
• Pound to Euro exchange rate today: 1 GBP = 1.1089 EUR, 24 hour best rate: 1.1133
• Euro to Pound Sterling exchange rate today: 1 EUR = 0.9022 GBP, 24 hour best rate: 0.9033

Those looking for a stronger Pound exchange rate this week will be hoping that some kind of recovery can be delivered by the slew of economic statistics on tap.

On paper the threesome of employment, inflation and retail sales data should certainly support the currency if they beat expectations.

However, these are not normal times for GBP and we are told that the currency is only likely to respond to negative data over coming days and will most probably ignore any positives.

The reason for this view is that sentiment towards Pound Sterling remains decidedly negative with data on how traders are betting on the foreign exchange markets confirming the bet against Sterling remains as popular as ever.

In short, the market is structurally aligned against the currency.

The primary public source for positioning data by currency and side is the CFTC’s Commitments of Traders data for the International Money Market (IMM).

This data essentially gives us a snapshot on how markets are betting on currencies and are therefore able to explain directionality and offer us some clues as to future direction.

Latest figures show bets against GBP represent the biggest long-USD position of IMM leveraged funds (and probably other FX investors) at present.

IMM leveraged funds’ net short of GBP is the biggest it has been since June 2013.

“However, the dynamic of how that position was reached is somewhat interesting. It has come from a complete collapse in GBP; GBP shorts were actually reduced slightly last week,” says Stephen Gallo at BMO Capital.

With an understanding of market positioning we can try and predict how the battered GBP will face the onslaught of tier-1 data due out of the UK economy this week.

The key data points for FX investors to watch are September inflation data (Tuesday) the September jobless claims print (Wednesday), September retail sales data (Thursday).

“Given the huge disposition of the market to sell GBP in this environment, we would expect FX investors to assign the biggest weight to the weakest piece of UK data,” says Gallo.

But because sentiment is so important to this currency the greater risks will continue to stem from news headlines concerning Brexit.

UK Chancellor Hammond is due to address the Treasury Select Committee on Wednesday and PM May is set to meet the head of the EU Commission on Friday.

While Hammond is likely to demonstrate his support for a Brexit deal which guarantees access to the single market and protects the UK’s financial sector, the GBP is unlikely to receive much relief in the face of such remarks given the splits within the cabinet.

Indeed, we have heard various reports over the weekend that Hammond is opposed to a hard-Brexit and sources have moved to quash rumours of any major split.

Nevertheless, a lack of unity in cabinet appears to have proven the perfect excuse to chase Sterling lower at the start of the new week.

Latest Pound/Euro Exchange Rates

	Live: 1.1455▲ + 0.1% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1066 - 1.1111
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* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

But, Downside Momentum for Sterling Slows

While GBP certainly looks heavy the currency has avoided plumbing fresh lows over recent days.

Cable dropped below 1.2150 but has found a few buyers at that level, although the pair was unable to climb above 1.2200 during London morning dealing.

"There is no doubt that the market in GBPUSD remains a standstill for the time being with traders just marking time as the key issues are now clear. Still the pair has not made fresh lows in over a week, suggesting that pound may be due for a small short covering rally as the vast majority of selling may done for now," says Boris Schlossberg at BK Asset Management.

BMO's Gallo agrees:

“We would expect GBPUSD to avoid a re-test of the 1.20 level next week if all UK data points hold up and nothing particularly negative emerges from May’s discussions in Brussels."

Goldman Sachs: Four Reasons to Expect Further Pound Weakness

Another notable development on the institutional research front is news that Goldman Sachs have told clients they remain bearish on Sterling.

In a recent research note Goldman’s cite four reasons as to why they believe the GBP sell-off is not done:

First, "While difficulties and hostilities around the process of negotiating Brexit have come to the forefront in the past week, in our view, the negative news has not yet been fully reflected in FX."

Second, "We expect data to deteriorate over the next year, surprising more to the downside than it has done so far, also weighing negatively on the currency."

Third, "We expect that monetary and fiscal policy will continue to place more weight on economic activity than on inflation; hence, policy news will be at worst neutral and at best negative for the currency."

Fourth, "The repricing of a policy rate hike in December by the Fed and the USD strength associated with it can also contribute to Cable downside."