Pound Sterling Pushes Higher on Classic 'Short-Squeeze' + Improved Risk Sentiment + UK CPI Data
The British pound is motoring higher as traders are forced to take profit on the sustained downtrend in the UK currency.
There are three reasons for the rally in the British pound:
- Better-than-expected UK inflation data, out on Tuesday the 12th of April
- Strong risk sentiment, notably risk sentiment on the German DAX which we believe to be a decent indicator of sterling sentiment.
- A heavily short market is being squeezed higher
The short squeeze is more a function of the technical nature of the underlying market in the pound to dollar exchange rate.
Often the market can move against the trend without any actual data; this should come as no surprise to those who have been watching the pound exchange rate complex of late.
After all, the hefty declines witnessed in the preceding week came amidst a lack of notable news.
Yes 'Brexit' is the underlying sentiment-squashing factor, but we need to consider just what a role the technical structure of the market is playing.
Hence, we believe today’s rise in the GBP/USD exchange rate, and indeed most other sterling-based pairs, is s technical short squeeze / profit-taking move.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3347▲ + 0.15%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2893 - 1.2946 |
**Independent Specialist | 1.316 - 1.3213 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
How the Short-Squeeze Works in Favour of the Pound
Betting that the pound sterling could decline further against the dollar than currently reflected in the GBP/USD exchange rate clearly requires one to buy some kind of contract that buys dollars and sells pounds.
The move will play its own small part in pushing the GBP/USD lower.
The move lower will continue as more players jump in down the line and take out a similar bet.
Now imagine every man and his dog are doing this; the market becomes incredibly one sided.
When some small trigger reverses the price action, for whatever reason, you can bet there will be a number of stop-loss exit orders that will be triggered as traders look to exit the market on any reversal in direction.
The problem is that there are so many trades that are stopped out that very soon there is a cascade of pound buying and dollar selling.
Like a fire, it burns back down the line, tripping stop-loss after stop-loss. The moves can be sharp and violent in nature and for those who are not familiar with such scenarios can appear rather alarming.
Importantly though, they don’t last forever, and while they may alter short-term technical structures, they do not change the fundamentals.
Hence, we continue to forecast the pound to dollar exchange rate to continue to slip lower.
