GBP/USD volatility soars as USD short squeeze fuels correction
The pound continues to trade in a choppy fashion as fragile risk sentiment puts a lid on the currency.
Volatility is rife for the pound, which in turn has seen the currency trade in a choppy fashion.
The rise in virus cases and subsequent lockdown measures have added to the pound’s woes, not to mention that political uncertainty has been heightened by the ongoing UK-EU trade talks. That said, while idiosyncratic factors have been a key driver for a weaker GBP/USD, there has also been an element of a short squeeze in the US dollar amid the pullback in risk appetite.
Figure 1. Multi year high USD short interest fuels correction
GBP rallies capped until tangible progress is made on Brexit
Despite the recent push back from the Bank of England (BoE) Governor on negative interest rates, GBP/USD struggled to sustain upside, suggesting that the pair remains vulnerable to further losses until tangible progress is made between the UK and European Union (EU) in reaching a Brexit agreement.
That said, with little positives going for the pound as of yet, rallies risk being capped, therefore putting support at $1.2690-$1.2700 into focus, where a break below raises the risk of a 1.26 test. On the topside, initial resistance is seen at $1.2790-$1.2800 and $1.2850.
Figure 2. GBP/USD price chart: daily time frame
IG client sentiment warns of reversal lower
IG client sentiment data shows 48.16% of traders are net long with the ratio of traders short to long at 1.08 to 1.00. The number of traders net long is 15.74% higher than yesterday and 0.45% higher from last week, while the number of traders net short is 2.69% lower than yesterday and 7.94% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net short suggests GBP/USD prices may continue to rise. Yet traders are less net short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net short.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
Please see important Research Disclaimer.
Start trading forex today
Trade the largest and most volatile financial market in the world.
- Spreads start at just 0.6 points on EUR/USD
- Analyse market movements with our essential selection of charts
- Speculate from a range of platforms, including on mobile
Live prices on most popular markets
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.