GBP/USD Rallies Back to Pre-Meltdown Levels

GBP/USD – Prices, Charts, and Analysis

• Sterling rallying hard as gilt market turmoil subsides.
• There remain plenty of Sterling headwinds.
• A big shift in GBP positioning as net-longs are slashed and net-shorts jump.

Sterling is pushing higher against the US dollar, and has made back all of its recent ‘mini-budget’ sell-off, as the greenback fades lower. The recent turn lower in US Treasury yields, sparked by fears that the US central bank is moving interest rates too high, too fast, has helped to stall the multi-month sell-off in cable. The pair are now back at the March 2020 swing-low around 1.1410, a level that stalled price action prior to the collapse.

The Bank of England’s (BoE) bond-buying program has so far done its job, and very well, forcing a sharp turnaround in the gilt market sell-off. The central bank’s program – buying up to GBP5 billion of long-dated gilts a day until October 14 – has seen long-dated bond yields crater, although they still remain at relatively elevated levels. The BoE has so far bought around GBP3.6 billion in long-dated gilts in the first four days of the program, and only GBP22 million yesterday, as the central bank controls the long end of the interest rate market.

UK 30-year Gilt Yield – October 4, 2022

Chart via @TradingView

The Sterling outlook is rosier than last week, and this is reflected in the British Pound at the moment, but the short-term outlook looks cloudy at best. The 45p tax U-turn by the PM and Chancellor has weakened the pairs standing in the country and the Conservative party, giving the Labour a massive 20 point+ lead in a wide range of polls, suggesting that the Tory party could be annihilated at the next general election. Chancellor of the Exchequer Kwasi Kwarteng spoke at the Conservative Party Annual Conference yesterday to a muted audience, while PM Liz Truss will address the Tory faithful on Wednesday hoping for a more positive reaction.

Cable may continue to push higher, with the 1.1700 area the likely landing zone, but with both sides of the quote showing signs of heightened volatility, the pair are likely in for a bumpy ride in the days and weeks ahead.

GBP/USD Daily Price Chart – October 4, 2022

Retail trader data show 55.15% of traders are net-long with the ratio of traders long to short at 1.23 to 1. The number of traders net-long is 3.12% higher than yesterday and 23.05% lower from last week, while the number of traders net-short is 6.85% higher than yesterday and 59.86% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.