Pound Dollar Exchange Rate: GBP/USD is a 'Buy' Opportunity Says ForexTell Contrarian

“My long-term macro view remains unchanged, namely that we should be buying GBP and the commodity currencies and selling the Yen, EUR and the USD.” - Sean Lee, Foretell.

The pound to dollar exchange rate (GBP/USD) has reverted to form at the start of the new week having lost a further 0.24 pct on Friday's close. Our last quote on the pair is at 1.5631.

The currency pair remains pressured with precious few traders out there willing to buy the pound sterling following this month’s Quarterly Inflation Report from the Bank of England.

As we can see below the direction in GBP/USD is certainly one-sided in nature at present:

Please note that the above quotes will be subject to a discretionary spread by your bank, it can vary wildly from the market rate. If you are looking to make international payments we suggest being quoted by an independent provider. By tapping the wholesale markets they can offer up to 5% more currency in some instances.

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"The market is now pricing a shallower rate hike profile for the UK, with only 75bps of hikes expected by end-2016. Headlines over the weekend are unlikely to provide any respite for GBP, with comments from both Governor Carney and Haldane striking a dovish tone. Both showed concerns about inflation, while the comments were broadly inline with the QIR, this will likely keep GBP on the back foot," say Lloyds Bank Research in a note to clients.

Is it Time for a Comeback by the Pound Against the Dollar?

That famous contrarian mantra of Warren Buffett states: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”

Would you buy the GBP/USD while all other are selling? I wouldn’t, the trend is simply too entrenched with no signs of abating.

However, nothing lasts forever. What should currency-watchers be concious of when picking the bottom of the pound dollar exchange rate downtrend?

Sean Lee at ForexTell is one analyst with an eye on buying sterling against the pound:

“My long-term macro view remains unchanged, namely that we should be buying GBP and the commodity currencies and selling the Yen, EUR and the USD.

“The market has gone from bearish USD, to primarily bearish EUR and JPY, but I see this as being different to being wholly USD bullish.

“The turn in USD/JPY has of course forced a short-term turn in cable, AUD/USD, USD/CAD etc, and quite substantial ones at that.

“But I’m of the view that these moves are wrong, and will be eventually sharply reversed.

“But could USD/JPY explode higher towards 125? Absolutely it could, and if this happens then I’m sure the USD will make more short-term gains against the commodity currencies. So it’s certainly possible that cable sees 1.53 and AUD/USD sees .83.

“But at some stage I had intended to re-enter the long cable trade and we are at, what I consider to be, comfortable levels. (Cable is the GBP/USD).

“I’m dipping my toes in the water with a small cable long position; let’s see what happens.”

Pound at 14 Month Lows

Sterling fell to new 14-month lows, repercussions from this week’s game-changing subdued inflation survey from the Bank of England (BOE) that launched deeper into next year the timing of a possible rate hike.

"The BOE believes inflation, running at a five-year low of 1.2%, is yet to bottom and may do so in the months ahead below 1%. The BOE aims for 2% inflation so the longer it takes for prices to recover to healthier levels, the more leeway it would give bankers to keep rates low to spur the economy," says analyst Joe Manimbo at Western Union.

Inflation will be a dominate theme for the pound next week when the CPI comes due on Tuesday and is forecast to show prices edged up to 1.3% for October. Wednesday (Nov 19) brings the minutes from this month’s BOE meeting. So lots of risk and uncertainty tied to the pound next week.

Dean Popplewell at MarketPulse says he is not surprised to see investors shunning the pound:

“The pound has hit a multiyear low and threatens to breakthrough £1.5650 with some conviction. It comes as no surprise to see investors shunning the sterling altogether after the BoE slashed growth and inflation forecasts in the QIR.

“The governor now expects the U.K. economy to grow +2.9% next year, weaker than the +3.1% that he and his fellow policymakers were predicting only three months ago.

They also expect to see inflation dip below the psychological 1% handle within the next six months. Slashing growth forecasts has allowed fixed-income traders to dramatically trim their expectations for an interest rate hike.

“Previously, the market was gunning for a midyear hike in 2015. Now it has to fall in line with U.K. policymakers who forecast the first U.K rate rise to occur in the third quarter, 2015. At the moment, there is little incentive to want to own GBP, nevertheless, do not be surprised if the market does happen to see better levels to “short” the pound. The lack of market participation has a habit of achieving this, especially when close to any holiday period.”

Speculative Traders Turn More Bearish on GBP and Yen

The CFTC Commitments of Traders report for the week ending on November 11th shows a minor reduction in the overall implied net USD long position, which fell to US$45.1 bn from US$45.7bn the week prior.  

Changes in positioning were moderate in general, with the most significant one being a net-short reduction in EUR from –179K to –163.9K.

The JPY, on the other hand, saw an extension of net shorts from –71.7K to –82.6K contracts.  

"GBP ran a similar fate, as a net short extension took overall market positioning in sterling to –12.9K from –7.5K prior," note TD Securities in a note on the matter.

Across the Dollar Bloc, speculative investors turned more pessimistic regarding CAD’s outlook; net shorts were ramped up to –21.8K from –19.4K.  

Contrarily, the NZD benefited from net short covering, which left positioning at a low –1.0K contracts.  AUD registered virtually no changes in positioning. 

Speculative traders extended net shorts on both CHF and MXN, leaving their respective  total net short positions at –22.7K and –29.7K.

"Taking together the performance evidenced by both CHF and EUR, it appears speculative investors were betting on a lower EURCHF, in line with the developments in the spot market this week," say TD Securities.

"In all, the currencies we cover in this report continue to show net shorts across the board, which, not surprisingly, translate into net USD longs remaining near record high levels, despite the minor reduction seen over the last reporting week," says the TD analysis.