Why I'm Shorting the Cable

If you didn’t get on the GBP short-sell bandwagon early last year, now might be a good time to jump on. The embattled currency has been making consistent and relatively significant losses since last year. With ludicrously low inflation and sluggish GDP growth, the Pound began its decline and the markets began to capitalise. Only exacerbating the issue is the talk of the “Brexit” which served to push the pair even lower as risk-shy investors sought safer markets. With the recent gains made during the fallout from the Fed rate decision, now could be the opportune moment to get in on the action.

The Pound’s decline began in earnest when it finally broke the 1.4982 support level mid-December 2015. The pair tumbled, and at its low it was trading at the 1.3850 level which hadn’t been seen since 2009. Sensing that the pound had strayed into oversold territory the market adjusted and began a corrective movement until the recent dovish Fed announcementlifted the pair up to 1.4465. The question for traders now remains; will the pound fall back to its recent low?

Firstly, we need to look to the behaviour of the central banks.The Bank of England is basically unable to lift rates for some time yet as Britain’s current economic conditions simply won’t allow for a hike.While inflation is still flirting with 0% or even negative figures the bank has little in the way of choices. On its own this fact may not be indicative of another dive in price. However, the US Fed has been giving some teasers that they could be eyeing a rate increase much sooner than they previously alluded to. The potent combination of the Bank of England’s inability to move on rates and the hints being dropped in Denis Lockhart’s announcement today could mean the Pound is setting up to start its fall anew.

Only adding to the speculation that the GBP is at further risk of falling is the constant Brexit rhetoric. With very real fears that the UK could leave the European Union, many traders are either attempting to avoid or capitalise on the risks the Brexit poses. This increased selling pressure is adding fuel to the fire, making it very hard to argue that the GBP will recover in the short term. As the June referendum draws nearer this pressure will only increase.

Even without the storm of sentiment trading raging around the Pound, technicallythe pair looks to be heading back to the 1.3850 mark. Despite the large price increase the recent swing away from the USD caused, the 100 day EMA was still unable to be flattened out completely. Still trending down, the EMA paints a fairly damning picture for the Pound. When EMA data is combined with the fact that the pair was unable to break the 1.4465 resistance level, the outlook for those short selling the pair is good.

Also giving hope to those looking at short selling the GBPis the pair’s inability to break out of a bearish channel. The recent price increase tested the upper constraint but was unable to buck the trend entirely. Ultimately the pair is being forced back within the confines of the channel and will likely continue to descend until testing the lower constraint at the 1.3856 level.

Going ahead, the combination of technical and fundamental indicators is making short positions of the GBP an attractive prospect. Although going short now may not yield the same return as it is going to for those who jumped on board last year, at the end of the day its better late than never.