The inflationary pressures in the UK have been consistently keeping the GBP bid over recent weeks. Inflation pressure kept up expectations of the Bank of England needing to hike interest rates in order to contain the pressure. If we look at the gains in the GBP at an index level, we can see the gains have been constant for most of the year.
This also resulted in an extreme GBP buying position in the commitment of traders’ report.
One very simple way of using the COT report is to look for market extremes. Ideally, you want to see a report where the market is heavily positioned in one direction. If some news breaks in the week that contradicts this market positioning, then many of those investors are underwater and will be closing their positions. The GBP has now seen some news that shows a slowing down of the UK economy.
Stretched GBP longs now have reasons to fall
On Friday, August 18, there was a big miss in UK retail sales that was blamed on a wet July for the UK. Indeed, the weather was very poor. However, the weak PMI data on August 23 was much harder to ignore. All three readings missed minimum expectations across the board. Furthermore, the services sector, which enjoyed a post-COVID demand boost, has now fallen firmly into contractionary territory. See the print below.
So, now the stretched longs have reasons to fall and investors should watch out for medium-term GBP weakness. Any currency that is strong could be potentially traded against the GBP and, as long as the UK data continues to show signs of slowing, the GBP could be losing value. One obvious question is, will EURGBP now find gains from the key daily support level marked below?