The GBP has had a big sell-off against the GBP and has also seen weakness against the EUR.
Will we see the downtrend continue?
Our view of GBP/USD and EUR/GBP in terms of the fundamentals, sentiment, and technicals below.
“The pound has remained on a slippery slope. Especially in the crosses, GBP could strengthen as the market is sitting too much on the bearish side ahead of next week’s Bank of England (BoE) meeting.
We think markets may be positioning a bit too much on the bearish side of sterling ahead of next week’s BoE meeting, and the drop is starting to look stretched, especially in the crosses.” (ING)
The market is looking for a very dovish Bank of England in terms of interest rate hikes going forward the logic is with a slowing economy the bank will not be hawkish but they have already said that inflation is their major priority so they are unlikely to be as dovish as the market expects.
Furthermore, the market is seeing the UK economy as one which will be hit the hardest by the Ukraine crisis, and here is a typical headline:
“UK set for slowest growth in G7 as Ukraine war hits the global economy. The UK’s economy is now predicted to grow by 3.7% this year, down from the previous forecast of 4.7% made in January.
However, next year, the UK is expected to have the slowest growth in the G7 and across Europe’s main economies, at just 1.2%, a near halving from the 2.3% expected previously.” (BBC NEWS)
The EU economy will be hit harder than the UK and the growth projections are from the IMF which tends to be wrong on a lot of their long-range forecasts and we think they are wrong in terms of the UK.
In terms of the Euro, Russia has already cut off gas supplies to Poland and Bulgaria but:
“If Russia cut off gas exports to Germany, the government would probably ration gas consumption. Households would probably be protected, so industry (especially chemical and metallurgy) would be worst hit, causing a deep recession” (H Gardner Capital Economics)
Germany is, of course, the powerhouse of the zone and most reliant on Russian gas, and the odds of a recession are high at this moment in time without a full cut-off of gas.
Also, the market in our view sees the ECB has to hawkish expecting a rise in interest rates to 1% within a year – we don’t think this will happen and in our view both the economic outlook favors the GBP over the EUR.
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In terms of EUR/GBP, we are long-term bearish but in terms of GBP/USD, we are only looking for a correction as the USD is likely to remain in a long-term uptrend.
The speculative positioning though is now so extreme we could see a major rally. The positions of speculators and smart money commercials can be seen on the chart below.
In the past large divergences have seen sharp rallies in the GBP to correct oversold and we expect one to unfold shortly.
Technical Analysis
In terms of GBP/USD, we expect a breakout above the 1.2600 level to follow through up to 1.300 as the large number of speculators who are short are taken out on stop.
In terms of EUR/GBP, the recent rally has failed into the 0.8450 level and we now expect a move to daily support and if this breaks, a move down to big monthly support at 0.8000.
