GBP Desperate for Bullish Catalyst

Sterling Weekly fundamental Forecast: Mixed

• Inflation and the UK’s disposable income challenges weigh on sterling
• Heavy hitting March inflation data (US and UK) heightens chances of another surprise to the upside
• Seasonality chart reveals April as the best month for GBP on average

Source: TradingView, prepared by Richard Snow

Inflation and the UK’s Disposable Income Challenges

While the pound has done alright against weaker currencies like the euro and yen, it has continued the long-term downtrend since June 2021 when looking at GBP/USD. Understandably, the dollar has been phenomenally strong from a fundamental point of view and more so recently due to its safe-haven appeal amid the ongoing invasion of Ukraine. Nevertheless, cable appears to be stuck near the lower bound of the descending channel around the psychological level of 1.3000 with no clear bullish catalyst.

Customize and filter live economic data via our DaliyFX economic calendar

Sterling continues to struggle as UK battles rising inflation and a cost of living crisis resulting from higher prices (mainly energy costs but includes higher NI contributions) which squeezes household disposable income. If households are left with less money after paying bills, that equates to less spending and less economic activity, locally.

Speculative Institutions Remain Bearish on Sterling

The Commodity Futures Trading Commission (CFTC) issues a weekly report on the aggregate positioning of large institutions (excludes treasury desks that typically hedge exposure) and hedge funds. Data from Tuesday the 29th of March reveals that traders remain net-short GBP/USD as can be seen by the diverging light blue (shorts) and orange (longs) lines. New data is expected later on Friday.

Commitment of Traders (CoT) Report, CFTC

Source: TradingView, prepared by Richard Snow

Below is a live snapshot of IG retail client sentiment, which often differs from sentiment shown in the CoT report.

Risk Events to Provide Possible Catalyst

As far as risk events are concerned, next week provides traders with both the US and UK inflation data for March. The March figures are set to capture a fair amount of the negative price shocks that have resulted from already constrained supply chains but more importantly, the Russian invasion of Ukraine.

Customize and filter live economic data via our DaliyFX economic calendar

With inflation data frequently beating forecasts, potentially hotter UK inflation may reignite hawkish rhetoric from the MPC members ahead of the May interest rate decision. Rates markets are currently pricing in just shy of 25 basis points for the BoE’s May meeting while implied probabilities of a 50 bps hike from the Fed in May stands at 88%.

Seasonality Favors GBP Strength in April

Interestingly enough, the pound tends to have its best month during April and worst month in May according to data from 1 Jan 2010 to now. If that were to be the case this year, sterling would reverse from relatively low levels, providing an attractive risk-reward setup. However, no clear signs of a bullish reversal have presented themselves and so we look ahead to the economic calendar next week for potential catalysts.

Seasonality Chart of GBP/USD (1 Jan 2010 – present)

Source: Refinitiv, prepared by Richard Snow

The fundamentals and price momentum certainly favor sterling weakness, however, strong seasonal performance by sterling in April provides reason enough to consider the possibility of a GBP pullback/reprieve after a steady run of losses. Next week will certainly be more telling.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX