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GBP/USD: Picking the Bottom Is Risky Business

  • GBP/USD is closer to flash crash levels than ever before
  • Political chaos in the UK is just one act in a long tragedy for the pound
VARIANSE
Chief Economist
Jul 6, 2022, 6:03 PM
GBPUSD
%
sell
buy

GBP/USD's Fall Is Far From Accidental

GBP/USD is closer to 2016 flash crash levels than ever before. At the time of writing, the pair was down by -1.61% so far this week to trade at 1.1895. That’s not too far from its weekly low of 1.1876. Circumstances today, however, are very different than they were during the flash crash. GBP/USD’s fall from its 21 May 2021 high of 1.4250 has been anything but accidental. The political chaos in Westminster this week is just the latest act in what has been a drawn out tragedy for the UK economy in 2022. Fears of global recession haven’t helped the British pound either.

The Narrative Is Bad

Economic contraction and record high inflation are two factors the Bank of England will need to contend at its next meeting on 4 August. A weaker pound is unlikely to help either in the near term. But even if the Bank of England does raise interest rates at a faster pace of 50 bps, how does it compete with the Fed, which is hellbent on tightening interest aggressively even at the cost of higher unemployment? These are questions traders should be asking themselves as the size up GBP/USD.

Is Positioning That Stretched?

Knowing the current context behind the GBP/USD’s latest fall, I do question whether it is sensible for big buyers to swoop in and buy up the British pound at levels south from here. The latest CFTC net speculative positions for GBP/USD certainly show the market moving less bearish than before, but given that positioning didn’t look massively stretched prior, that may just add the capacity for more shorts before the situation looks out of hand.

Trade Cautiously

GBP/USD could very well rise in the coming days, but I am personally holding out from buying until there are decent signs from the price action of either a potential reversal, or even retracement, before committing any capital. Even better if that price action is catalysed by a big shift in the narrative around GBP/USD. Until then, I am trading this pair cautiously and without much conviction.

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