Latest data that sheds light into how traders on the vast global foreign exchange market are positioned confirms bets for further Euro strength remain the most popular trade.
Meanwhile, bets against the US Dollar and British Pound appear to be increasingly popular.
The data is provided on a weekly basis by the US Commodity Futures Trading Commission and provides analysts with the most comprehensive view of sentiment and structure in the market.
“GBP sentiment deteriorated while net bullish AUD positioning increased and speculators lifted bullish gold bets,” notes Shaun Osborne, Chief FX Strategist wth Scotiabank in Toronto.
There is now an overall short position on Sterling (i.e bets against the Pound) of USD2bn.
Meanwhile, “significant exposures remain evident in other currencies, specifically net EUR longs,” says Osborne.
FX specs on CFTC hold onto biggest net long euro position in 6 years. Barring one week in May 2011, euro longs the highest in a decade. pic.twitter.com/D8HS1JIXmO— Jamie McGeever (@ReutersJamie) July 31, 2017
We believe these dynamics add to the view that the Pound to Euro exchange rate is likely to remain under pressure for some time, particularly if the headline EUR/USD continues to surge.
The Dollar which is one of the worst-performing global currencies of 2017 continues to find little support from the trading community, ensuring EURUSD has been the best performing G10 FX cross so far this year.
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“Bearish sentiment on the USD rose again,” says Osborne, “with speculative traders unafraid to extend negative USD positioning ahead of the key event risk of the week, the FOMC policy meeting.”
Aggregate positioning in the major currencies now reflects an overall USD short position of USD9.7bn, an increase of just under USD2bn on the week and Osborne says this represents the biggest bear bet on the USD since 2012.
But is the market in danger of getting too stretched? Often if markets increasingly bet in a single direction the move itself can fade or reverse as the market runs out of the fresh entrants required to push the move along.
"Although the market is long EUR, positioning is not stretched. EURUSD has appreciated despite the market already knowing the ECB will have to announce QE tapering and the Fed already hiking more than markets have been expecting this year. The EURUSD move has been consistent with the data and could continue if relative EZ data keeps improving," say Bank of America Merrill Lynch.
The bets against the US Dollar reflect deteriorating sentiment in the analyst community with regards to the currency’s outlook with many now saying the Dollar’s multi-year bull-run is over.
“We have updated our G10 forecasts to reflect an anticipated pause in the Fed rate hike cycle during H2 2017,” reads a research briefing from BNP Paribas. “We see scope for the USD to recover some ground in the near term, but the US dollar is not expected to regain its 2016 highs.”
Eurozone Inflation Data Key Trigger to FX Moves Ahead of New Month
The big event for the Euro exchange rate complex - and indeed currency markets in general - in the coming week falls on Monday, July 31 when Eurostat release Eurozone-wide CPI inflation data for July.
The Euro found some solid support in the preceding week when inflation data for individual Eurozone countries were released as the data suggested inflation is picking up, particularly in Germany.
Should the Eurozone inflation data confirm the view that prices are locked in an upward trajectory, the Euro should find further buying interest as traders bet that the European Central Bank can look to start withdrawing its stimulus programme.
Noting the strength of the Euro at present, a good reading will reinforce the uptrend.
“Given still-flat positioning, the weak USD and the focus of FX investors on the timing of the ECB’s QE taper, we would expect a bigger move in the EUR in the event of a hotter than-expected core reading. A reading of 1.2% YoY or more in core inflation could cause a breach of resistance at 1.1800 in EURUSD,” says Greg Anderson, an analyst with BMO Capital Markets.
Noting the importance of moves in EUR/USD for EUR/GBP we would suggest such an outcome would heap fresh pressure on Sterling ahead of the new month.