Traders Prepare for More US Dollar and Pound Gains AND More Euro Declines Expected

Forex traders remain overwhelmingly positive on the outlook for the US dollar while sentiment towards the pound sterling (GBP) is also seen improving.

The euro is predicted to continue trading in a weak fashion as currency market future contracts remain negatively positioned on the shared currency. This despite a recent relief-inspired rally at the start of the new week which we expect to prove fleeting.

• Indeed, the data comes as we see the pound at 11 month lows against the US dollar - the pound to dollar exchange rate (GBP/USD) is quoted 0.03 pct lower at 1.6081.
• The euro is at two year lows against the dollar; the euro to dollar exchange rate (EUR/USD) is 0.23 pct lower on last week's close at 1.2625.
• The pound to euro exchange rate (GBP/EUR) is 0.22 pct higher at 1.2737.

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Investors Poised for Further Dollar Gains

The USD continues to be held in high regard by speculative investors and CTA-type accounts.  

The latest Commitments of Traders report shows an increase in implied net USD longs to $37.6bn on the week ending on September 30th from $35.2bn the week prior.  

"This is the most bullish bet on the USD since May of last year and certainly within the largest levels since 2007," says a comment on the matter issued by TD Securities.

GBP saw a change in fortunes for the better, as -1.0K net shorts shifted into +3.6K net longs.

Meanwhile investors remain overwhelmingly bearish on the outlook for the euro.

However, there was modest short covering in EUR positioning ahead of the ECB meeting, which saw net EUR shorts reduced from -142.0K to -137.5K.

"Net shorts in the Eurodollar space decreased for the third consecutive week, but remain high. Open interest in Eurodollars is also very high as investors continue to position for the Fed to begin raising interest rates in the near-future," says Cheng Chen at TD Securities.

In line with the move on EUR net short contracts, CHF registered short covering to -12.6K from -13.4K prior.

Currency Markets Ahead of the New Trading Week

The EUR ended the week lower against the USD this past week as Eurozone inflation slowed in September. Separately, weak September manufacturing activity in the region weighed on the common currency.

The GBP fell against the dollar during the week, amid a larger than expected decline in GfK's consumer confidence index in the UK in September and a slower expansion in the UK manufacturing activity in September.

The GBP weakened 1.7% against the USD to finish at 1.5973, while the EUR slipped 1.3% against the USD to close at 1.2516.

The USD ended mostly higher against most major currencies last week as a solid rise in non farm payrolls report in September boosted the greenback.