GBP/USD: Longest run for GBP net longs since mid-2018 is unwinding

The pound is under pressure at the start of 2020 as we head into the era of Brexit trade negotiations within a dovish Bank of England environment - a toxic cocktail for GBP bulls. 

A busy start to the week on the UK calendar has pressured sterling today. GBP/USD is currently trading at 1.2982 having travelled between a low of 1.2961 and 1.3045, -0.59% on the day so far following disappointing UK data releases.

UK data rhymes with recent BoE dovishness

GBP fell in London today as UK Gross Domestic Product missed the mark for November, month on month, -0.3% vs 0% expected and below 0.1% prior. Manufacturing and Industrial Production were also disappointments, both coming in well below forecasts. 

Market expectations of a BoE rate cut in Jan jumped to 46%

In fact, we have heard recently from yet another Bank of England policymaker who has floated the idea of cutting the central bank's main interest rate. Gertjan Vlieghe told the Financial Times he will consider voting for a rate cut depending on how the economy has performed since the December election. Mr Vlieghe is the third Monetary Policy Committee (MPC) member this week to suggest they may be willing to cut rates at the end of this month. Mark Carney, the outgoing governor of the Bank of England, said in a speech last Thursday that it was prepared to take "prompt" action if economic weakness persists.

"With the relatively limited space to cut Bank rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,"

– Mark Carney said.

Brexit uncertainty to spark a sell-off

GBP/USD peaked in the 1.35 handle last month following the Tory election victory but was quickly sold on prospects of a hard Brexit after UK PM Boris Johnson expressed an adamancy that the transition period would end before the turn of 2021. This is leaving little time, according to the sceptics, for a trade agreement between the EU and UK. European Commission chief Ursula Von der Leyen was also recently quoted in French and German press expressing doubt that any future relationship can be agreed with the UK before the end of 2020, nailing down the coffin for overcommitted GBP bulls at the turn of the year. 

Since its departure from the 1.35 handle, cable has seen as low as 1.29 the figure before a solid correction back towards the 1.33 handle which ensued during thin holiday trade. This is when the US dollar took a sudden trip to the downside. Since the return of full markets, however, cable has been deteriorating between a range of 1.3288 and 1.2962 as traders get set for fresh flows of Brexit headlines surrounding the transition period and a new trading agreement. Such uncertainty will likely weigh on GDP growth raising prospects for a diligent mix of fiscal and monetary stimulus later this year. 

GBP positioning ripe for a sell-off

It would be prudent to note that the Net GBP positions had held in the positive ground for three consecutive weeks according to the latest CFTC Commitment of Traders Report released last Friday for the prior week which is the longest run for GBP net longs since mid-2018.  "The market has drawn support from PM Johnson’s claims that a new relationship between the UK and the EU can be negotiated by the end of the year," analysts at Rabobank explained, warning that the start of the talks could bring some disappointment – "Additionally, an increase in dovish comments from MPC members could pressure the pound." 

US dollar to find fresh legs

As for the US dollar, Chinese Vice Premier Liu He leads a delegation to Washington this week and is set to sign phase-one of the trade deal. Should there be a disappointment in a phase-one trade deal between the US and China, and/or escalation of tensions between the US and Iran, we could see a surge back into the greenback, propelling cable lower still. The risk is that markets will sell the fact and focus their attention on the thornier negotiations as part of a phase-two agreement which could stall positive flows in the money-markets, potentially supporting the US dollar in the interim, just as we have seen in previous uncertainty over the 18-months of the trade spat. 

The first key deal between China and the US amid their tensions is a trade deal, not an arms-control deal. If phase one deal is implemented well and there are follow-up agreements, the first half of the 21st century will be clearly different from the later half of 20th century,

– Hu Xijin, Chief in Editor for The Global Times tweeted in recent trade. 

Meanwhile, upcoming CPI and retail sales figures this week will also be a key focus for the buck and we still have UK CPI to go as well. 

GBP/USD levels

Yohay Elam, a Senior Analyst at FXStreet offer his analysis in the article, GBP/USD Price Forecast: At critical long-term uptrend support after the GDP downing: 

• GBP/USD has dropped below 1.30 following weak data and BOE dovishness.
• It is challenging a two-month-old uptrend support line.
• Downside momentum and the loss of the 50 SMA point to further falls.

Break or bounce? That is the question for the long-term pound/dollar traders who are eying the daily chart. GBP/USD has hit the uptrend support line for the fourth time – making line it even more significant. It has accompanied the currency pair since mid-November.