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Speculative investors are increasingly in favour of selling the British Pound according to flow data and analysis from a number of investment banks.
Analysts can gauge investor sentiment on a currency by observing 'open interest' in that currency on the options market where investors buy, hold and sell contracts on a certain currency in anticipation of it either rising or falling in the future.
Because some institutions are so large they can also observe their own order flow book to gauge sentiment.
"According to our FX positioning gauge, the GBP was sold for most of the past week with speculative-oriented investors such as hedge funds and real money driving most of the latest development," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
How the market is positioned on a currency offers clues as to how it might behave in the future: if a currency is neutrally positioned it could travel either higher or lower with relative ease.
But when investors are heavily invested in buying or selling a currency then the prospect of a counter-trend correction grows.
"The net GBP long saw a negative shift in positioning of USD578mn — the biggest move in favour of the dollar over the past week. This move roughly offset the USD508mn net bullish bet for sterling the prior week. Investors may have taken the GBP climbing to its highest point in three years as an opportunity to move against the currency," says Shaun Osborne, Chief FX Strategist at Scotiabank.
Osborne refers here to the latest Commitment of Traders data available from the Commodity Futures Trading Commission, the largest data set of its kind available.
The Pound's strong performance over 2021 leaves it looking to be one of the favoured currencies to own by speculators and therefore if such positioning becomes extreme any setbacks to sentiment could give way to a strong impulse of selling.
When investors crowd into a trade - for example buying the Pound - further gains become increasingly difficult to achieve.
The positioning on Sterling could therefore offer insights as to why the Pound has struggled to break to fresh highs against the Dollar and Euro of late.
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"Long contracts held steady over the week with gross shorts rising to a four-month high. The pound reached its three-year high on Tuesday (the cut off date for the data) so it may be a reach to attribute too much to this event," says Osborne.
Crédit Agricole data shows their corporate clients were among buyers of the Pound last week, but this was not enough to fully offset rising selling interest as a whole.
"Despite sentiment therefore seemingly having been in favour of selling the currency on rallies, overall long positioning remains excessive. This implies that the currency is likely to remain subject to downside risks. Having said that,
we stick to a cautious view on the GBP," says Marinov.
Francesco Pesole, FX Strategist at ING Bank says positioning in the Pound continues "its roller-coaster ride".
"Since mid-March, sterling’s speculative positions have followed a recurring pattern: an increase of 3-4% of open interest in net-longs in a week and the opposite move in the week after. As a result, GBP has remained in the net-long territory within a range of 13-19% of open interest," says Pesole.
Pesole says investors are now mainly looking at two main themes with regards to Sterling:
"The increasingly hawkish tone by Bank of England officials – with Gertjan Vieghle suggesting that a first-rate hike might come in 1H22 – and doubts about the planned easing of Covid-19 restriction in the UK on 21 June will go ahead (the decision will be announced on 14 June)."
ING say they continue to see further upside room for Sterling in the coming weeks, even if the full reopening of the economy is postponed.
"The slightly overstretched net-long positioning should not be enough to curb further GBP gains, in our view," says Pesole.
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards