GBP/USD Slumps, a Victim of US Dollar Strength

GBP/USD – prices, charts and analysis

• US dollar strength is forcing GBP/USD back towards multi-month lows.
• UK data could strengthen MPC doves leaving Sterling vulnerable.

The US dollar continues to flex its muscles across a range of currency pairs, fueled by further hawkish Fed rhetoric and rising US Treasury yields. Yesterday, both St. Louis President James Bullard and Cleveland Fed Chair Loretta Mester said a 50 basis point rate hike should not be taken off the table at the next FOMC meeting. Yesterday’s comments were the latest in a string of hawkish Fed comments and underscored the Fed’s intention to aggressively fight inflation. US Treasury yields continued to rise, with rate-sensitive 2-year bonds posting a fresh multi-month high of 4.72%, while the most recent Fed Fund closing rate rose to 5.30%.

2-year US Treasury yield – February 17, 2023

The US Dollar Index (DXY) rose in response to the recent hawkish Fed rhetoric and ongoing US bond market repricing. The greenback is now making fresh six-week highs and has broken the recent bullish flag formation.

US Dollar Index (DXY) daily chart – February 17, 2023

While the US dollar remains the main driver behind GBP/USD’s move lower, recent economic data suggests that the Bank of England (BoE) may become slightly less aggressive when deciding the future path of UK interest rates. UK growth has flattened, jobs remain strong, retail sales remain weak but marginally better than forecast while core inflation is falling. The BoE could decide that UK interest rates are starting to work and that they should be careful about making interest rates too tight. UK interest rates, currently at 4%, are now expected to peak at 4.5%, with a possible rate cut now being priced in at the December meeting.

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The British pound could see a modest gain in the coming days if market talk of an upcoming Brexit deal proves correct. British Prime Minister Rishi Sunak is reportedly in talks with the EU over a forthcoming deal on the Northern Ireland Protocol, although the role of the European Court of Justice remains a stumbling block.

Cable remains weak and is currently at levels last seen in early January. The pair has fallen below both the 20- and 50-day moving averages this week and is testing the longer-term 200-day moving average. Big number support at 1.1900 may be tested soon, leaving 1.1842 6th January low as next target.

GBP/USD daily chart – February 17, 2023

All charts via TradingView

Retailers increase their net long positions

Data from retail traders shows that 61.23% of traders are net long, with the ratio of long to short traders at 1.58 to 1. Traders net short is 4.13% lower than yesterday and 6.26 % lower than last week.

We tend to be contrarian on sentiment and the fact that traders are net long suggests GBP/USD prices could fall further. Traders are net long further than yesterday and last week and the combination of current sentiment and recent changes gives us one stronger GBP/USD bearish contrarian trading bias.

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