Since the beginning of September, the British currency has gained almost 3.5 percent against the US dollar, erasing part of decline since the beginning of this year due to uncertainty about the Brexit and British policy. From the beginning of the year, the GBP lost less than 1.3 percent to USD.
At a time when the British pound was falling, investors with a speculative approach to the market increased their involvement in short positions, which may gain as the GBP/USD falls. The scale of involvement in short positions was similar to the one we observed in April 2017. At that time, the bearish sentiment towards the British pound was the largest for at least a decade - according to CFTC data. The large short positions can lead to the so-called short squeez, which is a sharp upward movement amid closing of short positions. After April 2017, the GBP/USD exchange rate increased from around 1.24 to 1.40.
Currently, one of the main factors that could fundamentally lead to a rapid increase in the British pound, along with improved sentiment, is the Brexit agreement between Great Britain and the European Union to prevent Brexit without a deal. Only a little over a month is left to the UK leaving the EU, and as always, everything was left at the last minute. Nevertheless, recent days have markedly increased optimism about the possible agreement between London and Brussels, which has pushed the GBP/USD to its highest level in two months.
On Thursday, September 19, European Commission President Jean-Claude Juncker said he was doing everything to prevent Brexit without a deal. The Commission will work with the United Kingdom to reach a compromise - we found out yesterday and the effect is also observed today in the GBP/USD rate which is approaching the level of 1.2600. In a broader context, the pound defended support from the end of 2016 around 1.20 and as a result a potential pattern of a double bottom was formed, which is a trend reversal pattern.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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