The positive sentiment towards the British pound as the result of much better than expected PMI data earlier this month appears to have run its course, as the various GBP pairs have either stalled at key levels, or simply pulled back from their respective trends.
A run through the daily charts for the pairs confirms this bearish tone, and starting with cable the highlight here is the volume point of control at 1.3238. This is a price region the pair has been trading around since the Brexit candle with each attempt to move higher failing at various resistance levels, before a break to the downside in early August saw cable eventually fall to 1.2864.
However, what is interesting about this price action is that it also coincides with one of the largest increases in short positions at the CFTC for the British pound. Indeed at one point the net shorts numbered almost 95k contracts, and whilst these have been decreasing in the past couple of weeks, the rate of decrease has, so far, been minor.
Against the backdrop of the COT data, we could say the move off the 1.2864 level has been no more than a short squeeze, with only the much better than expected PMI data providing a genuine reason for positive
sentiment towards cable.
Cable’s high point was last Tuesday, where it was pushed to 1.3443 by the very poor ISM number that came in at 51.4 against a forecase of 55.4.
However, the following day, a combination of comments from BOE Gov Mark Carney, suggesting the BOE had not ruled out further interest cuts along with several FED members’ talking up a September hike, proved to be the catalyst for the start of the current reversal. The ensuing two bar reversal has taken cable back below the volume point of control, with only Monday’s minor rally higher providing some respite to the current bearish sentiment.
Of course, in the recent price action for cable traders have also had to contend with numerous comments and staetments from a number of FED members as to the likelihood (or otherwise) of a rate increase at next week’s FOMC. But, with the FED now in purdah ahead of next week’s decision, and with the Fed Funds futures now falling to a 15% probability of a hike, we can only look to the price chart for some direction.
In today’s trading session cable has managed to find support at 1.3137 as it attempts once again to regain the volume point of control at 1.3238, and as always the VPOC itself provides the benchmark for bearish or bullish sentiment to develop.
The floor and ceiling of the current extended congestion phase are extremely well defined, above and below the VPOC itself with the ceiling in place at 1.3490, and the floor well established at 1.2871. This reflects the truism that markets trade in congestion far longer than they do in trend. What we are also seeing is a classic example of how patience is required and wait for the next trend phase to develop. A firm direction will be signaled once one these levels has been breached, and confirmed, as always with strong and rising volume on the move away.
From a fundamental perspective this week completes the majority of tier one fundamental data for sterling, with only retail sales and the BOE rate decision, voting pattern, and monetary policy due tomorrow. unless we see some major surprises from either the BOE or the retail sales we can expect cable to continue trading around the VPOC until a much stronger driver such as the FOMC gives it some firm direction.
Meanwhile for intra day traders, there have been, and continue to be plenty of opportunities in the oscillating price action.
By Anna Coulling
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