The Pound overall has reinforced its position as the strongest G10 currency this year and ING points out that the trade-weighted index is now only 3% below the levels seen before the 2026 Brexit referendum.
Sentiment remains robust, but the surge in long positions this month leaves the currency vulnerable to a sharp correction.
The Pound to Dollar (GBP/USD) exchange rate has found support close to 1.2900 and secured a tentative net recovery to 1.2935.
Scotiabank is still broadly positive on the Pound; “The daily candle pattern shows a possible “harami” signal developing today which—if confirmed through the close of trade on the day—should signal firmer support at 1.2900/10. Resistance is 1.2970/75 and 1.3045/50.”
The Pound to Euro (GBP/EUR) exchange rate has edged higher to 1.1880.
The surge in long Pound positions will continue to be an important talking point.
The latest COT data, released by the CFTC, recorded a further surge in long, non-commercial Pound positions.
There was a record one-week jump in positions and a record high long position of over 130,000 contracts for the week. In value terms, long positions also reached a record high of $10.77 bn.
Rabobank commented; “GBP net long positions increased for the third consecutive week, in dramatic fashion, driven by an increase in long positions.”
The data illustrates the shift in sentiment seen after the UK General Election, but also increases the risk of a sharp correction if long positions are scaled back.
In this context, UK data releases will continue to be watched closely with markets also looking ahead to the August 1st Bank of England policy meeting.
The Pound will be vulnerable if the data is weaker than expected and expectations of an interest rate cut start to build again.
The latest PMI business confidence data will be released on Wednesday with markets expecting a slight net improvement from the previous month with both manufacturing and services sectors in expansion territory.
Benjamin Nabarro, chief UK economist at Citigroup noted weak retail sales data on Friday and commented; “If the economic recovery can be blown off course by a light breeze, maybe it was not especially strong which should cast doubt on underlying momentum.”
Overnight, President Biden announced that he would withdraw from the November Presidential election and endorsed Vice-President Harris for the Democrat nomination.
MUFG commented; “While his decision to withdraw appeared increasingly likely in recent weeks, it has injected fresh uncertainty into US politics ahead of November’s election.”
The bank added; “Overall the latest developments appear unlikely to significantly alter market expectations that Trump is on track to win re-election at the current juncture unless his lead in the polls starts to narrow in the coming months. We would view a tighter run race as less favourable for the US dollar.”
