Investors Bullish on Pound

Investment Bank Forecasts Upcoming Weakness against Euro and Dollar

Speculative investors are the most bullish on Pound Sterling since times predating Brexit, according to the largest snapshot of sentiment prevailing in the foreign exchange markets. The net number of 'long' contracts on Sterling held by speculative investors increased by a further 5K into the final week of June to 52K, according to the CFTC. "Speculators' net GBP longs are now at their highest level since July 2014," says Jane Foley, Senior FX Strategist at Rabobank. Yet, despite investors raising their bullish interest in the Pound to pre-Brexit highs, the Pound trended lower in the wake of the BoE decision and through the turn of the month. But the bullish sentiment on Sterling comes with a risk warning: the higher the net long position extends, the greater the risk the currency falls on a 'washout' in positioning. “Sterling in particular could be vulnerable to profit taking on stretched market longs," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole. Rabobank's Foley says she is of a view that the Pound's upside will be limited by concerns that rising interest rates at the Bank of England look set to enhance the UK's economic growth risks. Rabobank forecasts Sterling to end the year a little softer against the Euro around €1.15. For GBP/USD, it is USD direction that is anticipated to matter most. "We expect the currency pair will struggle to extend beyond recent highs and look for the currently pair to end H2 lower in the $1.22 region," says Foley.

Data 09.30: Final Services PMI expected unchanged 53.7.

EUR: Eyes on the doves

EUR/USD traded on the soft side yesterday, despite other pro-cyclical currencies finding some support. However, this appears to be mostly market noise and the pair may struggle to find clear direction before key US data are released later this week. ING Bank said "our perception is that – barring major data surprises – the uncertainty surrounding a second hike by the Fed after July and the European Central Bank's hawkish message (which has offset weak Eurozone data) can keep EUR/USD in a $1.08-$1.10 range for longer".

No major data.

Dollar bears still need data evidence

US markets reopen today and FX volatility should pick up again. The minutes from the June FOMC meeting will be in focus but according to ING Bank, they doubt markets will find much evidence to turn any less hawkish on Fed tightening, which will leave data releases the task of driving any substantial Dollar move for now. First of all, the minutes will shed some light on the compromise between keeping rates on hold but strongly signalling more hikes ahead. From a market perspective, it will be key to gauge where most of the committee sees core inflation dynamics going and the scope for further tightening. Markets will also be sensitive to any details about members’ positions on rate cuts. We heard some strong pushback by Fed Chair Jerome Powell in the post-meeting press conference against cuts in 2024, but the dot plot projections show easing starting sometime next year.

Data 19.00: FOMC Minutes.