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EUR/GBP, GBP/USD Update: Sterling Weakness Subsides as Built-Up Positioning Unwinds

EUR/GBP, GBP/USD Update: Sterling Weakness Subsides as Built-Up Positioning Unwinds

Talking Points:

  • Built-up hawkish expectations cause Sterling sell-off as sentiment stagnates
  • EUR/GBP and GBP/USD key levels to watch
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EUR/GBP is trading at a two-month high as the Pound has seen its worst performance against the Euro since April. Sterling has been the clear underperformer this week as positioning for a hawkish BOE has caused a position unwind on risk-off sentiment. The moves were also intensified in GBP/USD as the US Dollar has surged over 1.2% this week to its highest level in a year.

Central bank expectations have become a core focus of FX markets as the unwinding of pandemic-induced stimulus gets underway, with expectations about rate hikes being the main driver in positioning. Last week’s FOMC meeting was a key selling point for USD bulls as messaging suggested the central bank was primed to start reducing its bond purchasing program in November, with the updated dot-plot suggesting a rate hike could come by the end of 2022, which was more hawkishness than markets were expecting, causing a surge in the Dollar and shifting positioning against those pairs that were pricing in more hawkishness from their central banks, like the Pound and the New Zealand Dollar.

As mentioned by Justin, the Pound was positioned for disappointment with a 15 bps rate hike priced in for February 2022 at a time when data is likely to get slightly worse. The end of the furlough scheme this week is likely going to see unemployment rise but the Bank of England will want to see the extent of the impact on the jobs market before acting, which doesn’t leave much wiggle room without disappointing hawkish expectations. There is also likely to be a dip in sentiment-based data on the back of ongoing supply bottlenecks and Brexit drags.

The Pound is likely to remain sensitive to upcoming data releases as positioning unwinding continues but further bearish pressure is hard to envision in the short-term as the oversold conditions make it less appealing to attract new shorts. GBP/USD has found good support around 1.34 with an RSI shortly breaching the 30 mark so I would expect to see bearish pressure hold off for now as further direction is determined. A bounce above the 23.6% Fibonacci at 1.3577 is likely to see some follow-through above 1.3720 but we may see some sideways trading before another move is achieved.

In EUR/GBP, the move higher has started to reverse but we may see further follow-through if the pair holds above 0.86 throughout the day. Its 200-day SMA (0.8644) lies up ahead and is the main resistance going forward, so a weekly close above this level would be a good bullish signal for a new 5-month high above 0.87.

GBP/USD Daily Chart

EUR/GBP Daily Chart

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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