GBP/USD Update and Analysis
- GBP/USD looks to the US for main event risk to end the week
- Slowing GBP/USD bullish momentum – key technical levels considered
- IG Client Sentiment hints at continued bullishness despite 64% net long positioning
GBP/USD looks to the US for main event risk this week
There is very little risk of high impact timed events for the UK and probably for good reason as stagflation concerns start to pile up. March GDP the data confirmed a monthly contraction as the latest CPI printing hit a gigantic 9% – expected to top double digits before cooling down according to the bank of england (BoE).
Consequently, the United States takes center stage with May’s ISM manufacturing data and a number of speakers from the Fed, including hawkish James Bullard around 5pm GMT. Friday ends the week with the May non-farm payrolls (NFP) printout which is expected to add 325,000 jobs, further reducing unemployment to potentially 3.5%. The exceptional strength of the US labor market is often cited as a buffer for the fedaggressive paced hiking trail. Rising interest rates tighten monetary conditions, leading to fewer new hires and even job losses as businesses are forced to tighten their belts and watch spending.
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The pound benefited from a temporary dip in the value of the US dollar as fears of recession made their way into the media. Household names like Walmart and Target have reported some rather discouraging information about consumer demand and preference for cheaper alternatives when analyzing spending behavior. Additionally, US GDP for the first quarter of 2022 confirmed a contraction in the world’s largest economy (measured using real GDP).
Main GBP/USD Technical Levels Analyzed
GBP/USD bounced off the underside of the resistance zone which has a midpoint of 1.2700 and appears to be heading towards a recent support level around 1.2473. If we see a deeper retracement of the GBP/USD bullish momentum, 1.2400 becomes a level of interest with 1.2250 much further down the line. Interestingly, the volatility (measured using the 14-day moving average true range indicator) reveals a significant decline in volatility which tends to be conducive to ranging markets. Should the bullish move resume and break above the resistance area, the next level of resistance, the June 2020 high, will focus at 1.2813.
GBP/USD daily chart
Source: Trading View, prepared by Richard Snow
IG Client Sentiment Warns of Continued Upside Potential
Looking at the convergence of short and long traders over the past few periods (circles in red), there is a clear move away from the longs and up from the shorts despite the fact that there is still over 64% traders on the long side. As a contrarian indicator, feeling and market trends tend to move in opposite directions and the fact that we are seeing divergence between long and short positions may suggest a potential longer term uptrend. However, it is far too early to draw conclusions and be aware that net sentiment can swing back and forth as it did in January and February of this year.
GBP/USD: Retail merchant data shows 64.25% of merchants are net buyers with a ratio of long to short traders at 1.80 to 1.
We usually take a view contrary to the sentiment of the crowdand the fact that traders are net buyers suggests that GBP/USD prices may continue to decline.
The number of net-long traders is 0.17% higher than yesterday and 6.74% lower than last week, while the number of net-short traders is 7.73% higher than yesterday. yesterday and 17.17% higher than last week.
Still, traders are net less long than yesterday and compared to last week. Recent shifts in sentiment warn that the current GBP/USD price trend may soon reverse higher despite traders staying net long.
Sentiment Trading: Using IG Client Sentiment Data
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnotowFX