Evidence from the CME provides an interesting qualification to the CFTC positioning data that GBP investors have been watching closely. For many years now, markets have held a net short position on GBP, fluctuating from more neutral grounds through to a heavy focus upon achieving selling conviction behind the Pound at times. Sterling’s most recent recovery over the past few weeks has seen physical trade flows turn in favour of GBP, allowing investors to reduce the extent to which they remain negatively orientated towards GBP. We have seen this in the weekly CFTC data publications but the key for GBP, particularly running into today’s Autumn budget, is when will that short covering stop and in turn, release its tailwind supporting GBP. Thankfully, futures data allows us a glimpse in real time as to whether this process of short covering is ongoing.
GBP futures only cover a small portion and are a unique asset within a much wider market. However, it is reasonable and reliable based upon past events to infer that where this process remains active in the futures market, it may also hold true across deliverable, non-deliverable, spot, forward and derivative FX markets. The good news for Sterling bulls is that as of yesterday there remained a consistent withdrawal of open positioning across futures exchanges showing this trend to date is not dead. The bad news is, this was probably the flow of the last opportunity to exit such positions ahead of the budget today. With bond market conditions normalised to the degree of a pre-Kwasi era, it’s hard to see what more upside the Chancellor could afford Sterling. Short of redefining the landscape of fiscal policy before the House of Commons today, the Chancellor’s job will be to restore confidence through parsimony and credibility, not propel GBP higher.
USD – peak Dollar?
The US Dollar has corrected almost ten cents versus the Euro and more than fifteen cents versus the Pound since its peak only a short while ago. Despite its still well-supported position, such a correction of the Dollar inevitably sparks questions over whether the Dollar’s rally has stalled and in fact whether the peaks we saw only a couple of weeks ago, were the highest we’ll see, at least for this cycle. There are an increasing number of high-profile names joining the club claiming that the market is post-peak Dollar. Yesterday, Barclays joined those voices suggesting that recent US inflation data which showed a moderation in inflation in the face of rising interest rates was the last straw in the prospect for a return to peak-USD strength.
To compound to the risks facing GBP and potentially one catalyst for a return to USD buying is a huge and seemingly ever widening juxtaposition between policy makers within major central banks. This is true at least of the Federal Reserve but so too the ECB, and the BoE. Different policy makers within each of these central banks have suggested that monetary policy has both been tightened sufficiently and, from other voices, still has some way to go. There is a residual risk that a lack of clarity over any pivot in policy from these major banks could result in a deterioration in risk appetite once again. Rate expectations are therefore on the move. Within the Eurozone for example, the median expectation is shifting quickly from another bumper 75 basis-point hike to ‘only’ 50 basis points next month.
Discussion and Analysis by Charles Porter
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