Traders Increase Bets Against Pound Sterling and Dollar, But Start Turning Shy on a Very Popular Euro

• Reference Rates:
• Pound to Euro exchange rate: 1.1070
• Pound to Dollar exchange rate: 1.3034
• Euro to Dollar exchange rate: 1.1772

Foreign exchange traders continue to up their bets against the British Pound according to the latest set of data into the workings of the foreign exchange market.

Weekly figures from the US Commodity Futures Trading Commission shows the market holds bet against the Pound to the tune of $2.43 BN, an increase of $298 MN when compared to the previous week.

The increasingly negative sentiment against Sterling has been evident in the currency’s recent testing of nine-month lows against the Euro and signs that a top in GBP/USD’s 2017 uptrend might have formed.

Shaun Osborne, a foreign exchange analyst at Bank of Nova Scotia tells clients that the negative sentiment on Sterling appears to be increasing but it is also pointed out that negative sentiment on the US Dollar now stands at its largest since 2012.

“USD sentiment among leveraged and speculative investors deteriorated further in the week through August 1, the latest CFTC data show. The aggregate bear bet on the USD, expressed via the major currencies, rose by USD1.3bn in the week to total just over USD11bn, the largest bet against the USD overall since 2012,” says Osborne.

One currency that has seen a steady increase in positive sentiment is the Euro which has a bullish bias thanks to a $12.191 BN bullish bet amongst traders.

However, the bullish sentiment is now decreasing notes Osborne:

“Net EUR longs were trimmed very lightly last week and a bit more aggressively this week, perhaps reflecting market concerns that the rally had run on too far, too fast. Gross long liquidation accounts for virtually all of the USD1bn or so decline in the net EUR position this week.”

It is difficult to come to any conclusion on what this data suggests for the Pound to Euro exchange rate’s outlook - the increasing negative stance on Sterling would surely suggest markets are likely to continue pushing the rate down.

But because the increase in positivity towards the Euro is showing signs of fading we would suggest some downside support to GBP/EUR.

This could be the more relevant observation as we know that when sentiment towards a certain currency is at extremes it is liable to correction.

“2017 has been defined by strong exaggerated moves in many major currencies and after months of relentless uptrends, we are finally beginning to see signs of a top. Lower highs and lower lows or consolidation followed by rejection of key levels for currency pairs like GBP/USD, AUD/USD and USD/CAD has many investors wondering if deeper corrections lie ahead,” says Kathy Lien, Director of BK Asset Management.

“We have to recognise that U.S. Dollar weakness is the primary reason why the Euro and Australian Dollar are up more than 10% year to date,” says Lien.

According to Lien, recent jobs data from the US could well result in a major shift in sentiment on global currency markets.

The August jobs report beat analyst expectations and could well put a floor under negative sentiment towards the US Dollar which could in turn cap the growing love-in with the Euro.

In the middle of all this is Pound Sterling, which would arguably suffer losses against the US Dollar but perhaps see some much-needed relief against the Euro.

“These numbers are good enough to stem the slide in the dollar and ease gains in overbought currencies. In other words, the pullback that we've seen over the past week in pairs like EUR/USD, GBP/USD and AUD/USD is a top that should lead to further losses,” says Lien.

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