In terms of the COT Net Traders Positions the report is one of the best ways to detect trend changes in advance. In a report earlier in the week we looked at GBP/USD in terms of a potential reversal to the downside and this weeks COT report indicates there could be more downside to come...
In terms of the COT Net Traders Positions this week we can see that large speculators have added to longs while “smart money” commercials have added to shorts.
In terms of the speculative long position its been built up quickly and is the largest since 2014 which we can see on the charts below.
A Bullish Extreme and Far Lower Prices Expected
Large speculators are heavily long on the view we will see a hawkish Bank of England going forward but this is now discounted. What isn't discounted is the dire state of the UK economy. For anyone new to the COT Net Traders Positions the commercials are a major group and are hedgers – they will only move their hedges when aggressively when they think prices have moved to far from fair value and they have become heavily bearish the GBP.
We agree with this view on UK interest rates: “British consumer prices rose much less quickly in June than expected. The resulting strong market reaction confirms our expectation that the rate expectations priced in by the market do not justify sustainable GBP strength. Instead, we assume that the Bank of England will only tighten its monetary policy as far as necessary to control inflation expectations. The downside correction of the rate expectations following Wednesday’s inflation data is therefore not far-reaching enough for us, and we see further correction potential towards a weaker GBP.” (COMMERZBANK)
The Bank Of England will be mindful of the huge problems the UK economy faces U.K. growth has lagged behind the world’s biggest economies since the Covid-19 pandemic and is substantially below the OECD average, according to a new report from the influential Paris-based group. (CNBC) U.K. gross domestic product has contracted by 0.4% between the fourth quarter of 2019 and the third quarter of 2022, versus cumulative 3.7% growth in the 38-member Organisation for Economic Co-operation and Development.
The size of the task facing the Government is huge in terms of avoiding a recession: “The UK’s debt-to-GDP ratios are set to rise, and net gilt supply may exceed GBP250bn which would be a new record high. The UK’s fiscal deficit looks likely to go up to 6% of GDP. The UK’s core balance (i.e. current account balance + net foreign direct investment) has declined from a 2% surplus to an 8% of GDP deficit in the last two years. The UK faces a recession but the market is not seeing this scenario which is bearish for the GBP.
The good news is priced in for the GBP and there is more potential downside as speculators continue to exit the market on stop.
Our view of the support and resistance levels to look out for on the chart below.