Despite the recent performance of the GBP/USD currency pair, which collapsed to the support level of 1.2372 and settled around the level of 1.2413, sentiment towards the British pound continues to improve. The Commitments of Traders (COT) report showed that investors are the most bullish since 2021. The COT report is the largest and most widely followed report on the market situation and shows a trend throughout the year of improving sentiment towards the GBP from very negative territory. It shows that net long position in GBP now stands at net positive of 12,593 contracts, up from 4,528 in the previous week and pointing to a significant rally from its one-year low of net negative -80,372.
“Speculator positions in net GBP have risen higher and have now been positive for five consecutive weeks, indicating a marked improvement in sentiment compared to the start of the year. This reflects a slew of less dire UK economic data which led to an upgrade to the BoE’s GDP and inflation forecasts at the May policy meeting.”
For his part, Kenneth Brooks, an analyst at Société Générale, says: “Hedge funds turned more bullish on the pound last week, as they raised their long positions to 5% of open interest, the highest percentage since November 2021.”
The improved sentiment towards the British pound, coupled with the outperformance of the British currency, means it is the best performing currency in 2023.
Despite the improvement, the overall net position on the GBP remains relatively neutral as the long position can by no means be described as extended, suggesting that it faces two-way risks ahead. The same cannot be said for the EUR as the net positive attitude continues to rise amid investor relief that a major gas crisis was averted this winter, allowing the economy to recover strongly. Meanwhile, the continued rise in interest rates of the European Central Bank has improved the attractiveness of monetary assets in the eurozone, resulting in a net inflow of invested capital. But the positive outlook in the euro is now reaching extended levels, leaving the single currency vulnerable to sharp declines in the short-term driven by positions.
Britain’s public sector net borrowing rose unexpectedly in April, reaching £24.74 billion, compared to £20.02 billion in March, according to the Office for National Statistics. The figure far exceeded economists’ expectations of £17.5 billion, marking the second-highest level for the month of April since records began thirty years ago.
For their part, economists say the numbers will be a source of concern for the government, which will want to announce some “gifts” before the next election. However, one says it is too early for the Treasury to panic. For its part, Moody’s, a leading credit rating agency, warned that the prevailing socio-economic conditions in the UK, including an aging population and increasing healthcare costs, are likely to lead to a sustained increase in the country’s debt burden.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, highlighted factors that contributed to the surge in borrowing in April. He explained that the increase resulted primarily from a significant increase in the net investment of the central government, as it rose from £5.4 billion to £17.0 billion compared to the same period last year.
- According to the performance on the daily chart below, the path of the exchange rate of the GBP/USD currency pair against the US dollar is still heading downward.
- The continued strength of the US dollar from the results of the economic data and the content of the minutes of the last meeting of the US Federal Reserve will push the bears to move the currency pair towards deeper and closer support levels.
- The levels are currently 1.2350, 1.2280, and 1.2200, respectively.
On the other hand, the bulls will not regain control of the trend without the GBP/USD moving towards the resistance levels 1.2550 and 1.2630, respectively. The Sterling/Dollar pair will be affected today by the announcement of British inflation figures and the reaction from the statements of the Governor of the Bank of England, as well as the reaction from the announcement of the content of the minutes of the last meeting of the US Federal Reserve.
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