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GBP: Positive Tailwinds Continue to Boost Sterling

Sterling/GBP Talking Points:

  • Recent UK services PMI uptick points to stronger Q4 growth.
  • A lull in Brexit news is helping underpin the British Pound.
  • GBP/USD prices supported by positive client sentiment

Fundamental Forecast for GBP: Bullish

We remain buyers of Sterling, against both the US dollar and EUR, as recent economic data points to better growth prospects ahead, while Brexit headwinds recede, for now at least. Although we are GBP bulls, we prefer to buy on pullbacks rather than chase prices higher.

UK Economic Data Picking Up

Recently released data from IHS Markit showed the dominant UK services sector picking up in December, fuelling their belief that Q4 GDP will tick higher and hit 0.5%, better than previously expected. The services numbers followed solid manufacturing growth, albeit at a lower level than November, while the construction recovery continued with a robust rise in residential building outweighing a downtick in commercial projects.

All Quiet on the Brexit Front

There are only two firm Brexit dates in the diary so far this year, according to DailyFX analyst Martin Essex, March 29, 2018 and the slightly more fluid Autumn 2018. And this is unlikely to change in the short-term as both parties get down to discussing future trade agreements. In the UK, the political infighting within the ruling Conservative Party has abated for now, while over in Europe, French President Emmanuel Macron has called for unity ahead of the EU/UK trade talks, warning Europe could split if countries follow their own interest.

Investors Remain Short of GBP/USD, a Bullish Contrarian Indicator.

Retail trader data show 38.9% of traders are net-long with the ratio of traders short to long at 1.57 to 1. In fact, traders have remained net-short since Dec 28 when GBPUSD traded near 1.3402; price has moved 1.1% higher since then. The number of traders net-long is 11.2% lower than yesterday and 6.8% lower from last week, while the number of traders net-short is 7.8% higher than yesterday and 20.0% higher from last week. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bullish contrarian trading bias.

If you like to know more about IG Client Sentiment Data, click here

GBP/USD Price Chart Weekly Timeframe (July 31, 2015 – January 5, 2018)

GBP: Positive Tailwinds Continue to Boost Sterling

The chart above shows that GBP/USD is closing in on the September 2017 high around 1.36500, opening the way for the pair to retrace further with 1.3850 and then 1.4000 the opening targets. The pair are trading above the important 100-day ema, while the stochastic indicator is pointing higher, adding to the positive technical backdrop.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1