Record bets on pound growth will lead to a reversal

26 June 2023 210
Record bets on pound growth will lead to a reversal

The key rate hike by the Bank of England did not support the British pound. Upward spurt and exit from the downtrend were false. This circumstance is surprising, as the rate hike was 0.5% higher than analysts' expectations.

The dollar index, which began to strengthen in recent trading sessions, supports the continuation of the trend.


The consumer price growth remains high globally, which stimulates purchases of the U.S. currency. 

The risks of a prolonged period of elevated inflation have increased despite the current decline in prices in many parts of the world, Bank for International Settlements chief economist Claudio Borio told the German daily newspaper FAZ on Monday.

The analyst noted the stability of core inflation. It measures inflation excluding fluctuating prices for energy and food. This makes it difficult to continue to fight globally rising prices.

One of the reasons for this effect is that people adjust their behavior to higher inflation when it lasts for a longer period of time, which in turn leads to its entrenchment at a high level.


The futures market displays a strong bias towards the rise of the GBP/USD currency pair. Such behavior usually means the end of the trend and a move in the opposite direction. The record number of longs will cause a decline. 

According to the Commodity Futures Trading Commission (CFTC), traders increased bullish pound bets to the highest level in more than five years in anticipation of last week's Bank of England meeting. Leveraged funds increased their net long positions in pounds sterling to 42120 contracts during the week ended June 20. This is the largest amount since April 2018.

After the half-point rate hike, traders are predicting about an 80% chance of another move of the same magnitude in August.

 

According to technical analysis, the GBP/USD currency pair chart shows a downtrend. Now prices are closer to the upper boundary of this trend, which is a good reason to open a short position. The lower boundary of the trend and the local low, which corresponds to the level of 1.2685, will be the downside target. A stop-loss could be placed upon breaking through this trend upwards around the level of 1.2760.


A decline in GBP/USD:

Take profit – 1,2685

Stop-loss – 1,2760

This content is for informational purposes only and is not intended to be investing advice.

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