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Beware the GBP/USD Rebound Amid Surge in Retail Long-Interest

Beware the GBP/USD Rebound Amid Surge in Retail Long-Interest

David Song, Strategist

British Pound Talking Points

The decline in GBP/USD appears to have stalled ahead of the 2018-low (1.2662) amid signs of an imminent Brexit deal, with the British Pound outperforming against its major counterparts ahead of the Bank of England (BoE) interest rate decision, but the ongoing shift in retail sentiment undermines the recent rebound in the exchange rate as the pickup in volatility has been accompanied by a sharp rise in net-long interest.

Image of daily change for major currencies

Beware the GBP/USD Rebound Amid Surge in Retail Long-Interest

Image of daily change for gbpusd

The BoE’s meeting may generate little interest as the Monetary Policy Committee (MPC) is widely expected to keep the Bank rate at 0.75%, and even the quarter inflation report (QIR) may spark a lackluster reaction as the central bank ‘continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.’

With that said, more of the same from Governor Mark Carney & Co. may produce headwinds for the British Pound as the BoE sticks to its gradual approaching of implementing two rate-hikes per year, but the pickup in GBP/USD volatility may continue to fuel the shift in in retail interest as traders appear to be fading the weakness in the exchange rate.

Image of IG client sentiment for gbpusd

The IG Client Sentiment Report highlights an extreme reading as 77.1% of traders are now net-long GBP/USD, with the ratio of traders long to short at 3.36 to 1. Keep in mind, traders have remained net-long since September 20 when GBP/USD traded near 1.31450 even though price as has moved 2.3% lower since then. The number of traders net-long is 3.3% higher than yesterday and 20.9% higher from last week, while the number of traders net-short is 8.9% lower than yesterday and 19.4% lower from last week.

The persistent pickup in net-long position suggests traders are betting on a larger recovery as GBP/USD bounces back ahead of the 2018-low (1.2662), but the ongoing shift in retail interest may continue to offer a contrarian view as both price and the Relative Strength Index (RSI) snap the bullish formations from August. However, will need to keep a close eye on the RSI as it appears to be reversing course ahead of oversold territory, with the lack of momentum to break below 30 raising the risk for a larger rebound in the exchange rate. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

GBP/USD Daily Chart

Image of gbpusd daily chart
  • The 2018-low (1.2662) sits on the radar going into the monthly opening range for November as GBP/USD continues to carve a series of lower highs, with a break/close below 1.2630 (38.2% expansion) to 1.2640 (23.6% retracement) raising the risk for a move towards 1.2370 (50% expansion) to 1.2440 (50% expansion).
  • However, the bearish momentum appears to be abating as the RSI flops ahead of oversold territory, with a move back above the 1.2800 (50% expansion) handle open up the Fibonacci overlap around 1.2890 (50% expansion) to 1.2950 (23.6% expansion).

For more in-depth analysis, check out the Q4 Forecast for the British Pound

Image of DailyFX economic calendar for UK

Additional Trading Resources

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.