GBP/USD on edge as bearish bets on British pound hit highest level this year

  • GBP / USD ended the week at a critical level as declining pound sterling bets increased.

  • Data from CFTC showed that non-commercial participants had a short position of 6.7 thousand contracts.

  • Participants are likely to be concerned about Brexit and the coronavirus before deciding on the BOE interest rate.

The GBP / USD pair is at a critical level as declining pound sterling bets increase. The couple ended the week at 1.2500, which is an important psychological and supportive level.

British pound
GBP / USD pair at crossroads earlier this month

Investors are seeing the British pound increasingly bearish

Most investors and hedge fund managers have turned bearish against the sterling, according to the latest CFTC data. The data showed that the net positioning of “non-commercial” participants in the futures market dropped to 6.7 thousand in the previous week. This was higher than the drop of 1.4 thousand in the previous week and the highest this year.

The rising bearish pound comes at a time when the currency has performed relatively well. The pound index rose more than 0.88% last month, while the dollar index fell 40 basis points.

British pound against the USD
British pound index versus the dollar index

The British pound is not the only currency under pressure. After the spectacular rally last month, most hedge funds, retailers and other money managers have increased their declining bets on the Australian dollar. These bets rose from 34.8 thousand in the previous week to 37.7 thousand. The same was true for the New Zealand dollar and the Canadian dollar, whose declining stakes to 13.8 thousand or 29.0 thousand sinks.

Brexit and Coronavirus

Brexit and coronavirus are the biggest risks to the UK economy and the British pound. Brexit shows critical differences between the European Union and Great Britain regarding future relations. There is also an important challenge for a deal on the timeline.

Boris Johnson has insisted that his government does not seek to extend the transition period. According to the transitional document, he has until June 31 to apply for this extension. As a result, there is a likelihood that neither side will reach an agreement before the December deadline.

Analysts and the European Union believe that a deal of this size takes several years. This is made worse by the hard positions on both sides. For example, last weekJohnson urged the EU to withdraw on fisheries, environmental protection, labor law and legal issues. The previous week Michel Barnier complained the disappointing progress that the EU "refused to seriously address a number of fundamental issues".

In the meantime, the country is feeling the effects of the coronavirus pandemic. The PMI for production and services has dropped to its lowest level in existence. The unemployment situation also worsens seven out of ten companies expected to take leave of absence. Some analysts expect that Unemployment rate to increase from previously 3.9% to 10%. In addition, the government has suspended the property market and more companies are struggling.

BOE eyeing decision

The biggest news on the British pound is likely to be the Bank of England (BOE), which will make its rate decision on Thursday.

Analysts interviewed by Bloomberg expect the bank to leave the ECB and Federal Reservedid interest rates unchanged last week. However, most of them see the bank announcing additional quantitative easing. Citigroup employees expect the bank to add £ 200 billion of QE to the meeting. This adds to the £ 200 billion announced at the March emergency meeting. The bank has already bought £ 70 billion of these assets. An analyst at Citi told the FT::

“Without further QE, the price-sensitive private market would likely require significantly higher returns to absorb the issue. The BoE is unlikely to test this in the middle of a crisis. "

Technical outlook GBP / USD

Technical analysis of GBP / USD

A look at the four-hour chart shows that the GBP / USD pair hit an important resistance level at 1.2653 on Friday. This was the highest level since April 14th. We also see the couple settle at 1.2500, which is not only an important psychological level but also an important support. It is also along the diagonal support shown in blue and along the 61.8% Fibonacci retracement level.

A break below this support will likely result in bears trying to test the 50% retracement at 1.2300.

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