Markets Most Bullish on British Pound Since 2014, More Gains vs. Euro, Dollar Possible say Mizuho

Insights into exchange rate market positioning

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A fresh record of trades that anticipate Pound Sterling will continue to advance have been added to the global foreign exchange market place according to the latest set of data into market positioning. 

The data into how leveraged funds are betting suggests traders are now at their most bullish on the Pound since 2014.

Data from the Commodity Futures Trading Commission reveals the 5th successive week of improved sentiment towards the UK currency. In USD notional terms, the net long GBP position has climbed to a fresh multi-year high at $3.8BN, up from $3.5BN in the previous week.

The trends provided by the CFTC give insights into sentiment on a particular currency via positioning on the options market; options are financial products designed to deliver profit to their owner if the market moves their way over a set period of time.

"Leveraged funds on CME increased GBP/USD net longs for a 5th week to 74.7k contracts at 10 April New York close. This is the most bullish stance since August 2014 and could extend given better Brexit mood and that the Bank of England is ready to hike," says Sean Callow, an analyst with Westpac.

CFTC data shows bullish bets on Sterling continuing to grow

The data comes as the British Pound breaks to fresh ten-month highs against the Euro with the Pound-to-Euro exchange rate quoted at 1.1562 at the time of writing, having been as low as 1.1337 this month.

The Pound-to-Dollar exchange rate meanwhile trades at a new post-referendum high at 1.4354, having been as low as 1.3966 earlier in April.

We have reported extensively on the April boost that Sterling typically receives with one analyst warning at the start of the month that the Pound "tends to rally no matter what" in April. Those who heeded this call will be sitting pretty as we move through mid-month, but can the move be sustained over the second-half?

"The Pound continues to move higher on seasonal & inward investment flows," says analyst Neil Jones with Mizuho Bank Ltd. Jones does however say the prospects of a 'softer Brexit' and expectations for a May interest rate rise are somewhat factored in.

"However, further flow factors should continue to benefit, I doubt it is over," says Jones.

Positioning at the Pound is looking extreme

As we can see from the above, current positioning on both the Euro and Pound Sterling are at stretched positions by historical standards, and this does present another problem - stretched markets are prone to correction.

It could well be the case that some payback is given as sentiment stabilises and beware that with the important data on tap this week, a negative data print could be just the trigger to such a corrective move.

"GBP positioning is getting extreme just as the market gets very excited about GBP," says Kit Juckes, an analyst with Société Générale in London. "Two caveats should remain in the back of your minds. Firstly, the UK economy is still slowing and still underperforming its peers; and secondly, as CFTCF data show, there has been a huge turnaround in sentiment and positioning. Sterling was, and still is, cheap on a historical basis and the market's net short was huge. This move is only really an unwinding of that position as sentiment lurches."

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