GBP Short trade a bit crowded – UK inflation about to cause a squeeze?

August 14, 2019

By Admiral Markets

Source: Economic Events August 14, 2019 – Admiral Markets’ Forex Calendar

Today, our focus will be on the UK inflation rate and the GBP/USD. After the currency pair closed last week at its lowest levels since the 1980’s, chances are good that the currency pair will sustainably drop below 1.2000.

This is especially true if inflation comes in below expectations around 1.9%, potentially resulting in rising speculations and expectations of a rate cut from the Bank of England.

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Beside rising uncertainty in regards to the Brexit, disappointing economic data is currently weighing on Pound Sterling. Last Friday, GDP data came in weaker than expected, showed that the British economy contracted in Q2/2019. And it does not seem as if we get to see a turnaround here: so far, the course from new UK prime minister Boris Johnson hasn’t changed and chances are elevated that the UK will leave the EU without a deal.

In addition to global trade war fears driven by a further escalation in the trade dispute between the US and China, and more and more central banks around the globe starting new easing cycles in anticipation of a global economic downturn, it only seems a matter of time when the BoE will join with a rate cut itself, especially after the BoE already cut the forecast for 2019 to 1.3% from 1.5%, and its forecast for 2020 to 1.3% from 1.6% with a note that it will likely be lower in case of a no-deal Brexit.

That said, a reading below expectations will likely push GBP down on a broad front, and thus the GBP/USD below 1.2000.

On the other hand: a surprise, higher-than-expected reading could at least result in a short-term bounce higher and towards 1.2350/2400 since the latest CoT data last Friday showed the highest net-short position in Pound Sterling Futures since the beginning of 2017, this the Pound Short trade being a little crowded and vulnerable to a squeeze due to surprising data releases:

Source: Admiral Markets MT5 with MT5-SE Add-on GBP/USD Daily chart (between May 14, 2018, to August 13, 2019). Accessed: August 13, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the GBP/USD fell by 5.9%, in 2015, it fell by 5.4%, in 2016, it fell by 16.3%, in 2017, it increased by 7.4%, in 2018, it fell by 5.6%, meaning that after five years, it was down by 22.9%.

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