We have been looking to sell GBP/USD but it has proved us wrong and moved sharply higher but we are now seeing a record number of speculators long which points to a blow-off to the downside and we are looking for a downturn this week...

In our last article, we noted that the surge higher in the USD was supported by speculators having a hawkish view of the Bank of England in relation to interest rates and they have a dovish view of the Fed. You can read the article here

Interest Rate Outlook

The market’s dovish bets on rate cuts have now been cut back to only 14bp priced in for the 1st August BoE meeting, and overall 47bp in total for 2024 which we think is conservative we expect a cut in August, and a total of 3 cuts for the year. In terms of data this week we expect it to send the GBP lower.

UK Inflation Data

The June CPI report is out first on Wednesday:

“While we may see headline CPI tick a tenth of a percent or so lower in June, we think 2% more or less marks the trough. The drop in food inflation is at an end, and the drag from lower energy prices is currently at its peak and will ebb away as the year goes on. That should be counterbalanced by further progress on services inflation. Surveys suggest firms are raising prices/wages less aggressively, while rental growth looks like it has peaked. We expect services inflation to end the year at 4.5%, down from 5.7% in May.” (ING THINK)

It's services inflation which is the important part of the report for the BoE and a miss in this area is the key for the Bank of England to turn dovish, the big trend in inflation is down and we expect a rate cut in August.

Back in May, Governor Andrew Bailey said that the Bank Of England might cut interest rates at a quicker rate than markets expected at the time. June’s meeting showed that some officials saw the decision as “finely balanced”. We expect an August rate cut and probably three cuts in total this year.

Sentiment – COT Net Traders Data

In terms of bullish sentiment, Large Speculators hedge funds, etc have bought the GBP heavily this week and they have now moved to a new record high above the previous one which was reached back in March which we can see in the chart below. We can also see Commercial Hedgers have built up a major short position against them just like back in March we now expect a correction to the downside and we are looking to sell weakness and you can see our levels on the chart at the end of this article.

Note: When using the COT at big trend changes the commercials tend to be right while large speculators tend to be long we often get asked why this is happens...

Speculators' primary aim is to try to make a profit, they are trend followers and influenced by emotions, while they can be right about big trends for long periods of time they tend to always be wrong at big turning points. On the other hand, Commercials are simply hedging a cash price. Commercials are not trying to make a profit their hedging a cash position ( they don't make or lose any money) they are not driven by greed and have a deep knowledge of the fundamentals. They are always right at big trend changes while speculators tend to be wrong - We can't blindly follow the commercials as they're hedged they can ride out moves against them while we have to use good stop protection and key off big levels and we are coming into big resistance now. 

We expect a blow-off to the downside this week due to the extreme now reached in speculative positions which will probably have increased since Tuesday when the CFT compiled the data.

Technical Analysis

In terms of our view fo the key technical levels of support and resistance to look out for on the charts below.