Updated: Jun 27
Britain Bounce Back
Following our GBP Pre-Brexit market overview in April we had a short bias towards the GBP, this was because of the weakening fundamentals amidst uncertain outcomes with Brexit negotiations. Now that the event has been delayed the UK has time to bounce back and recover from the uncertainty. Recently, prime minister May has resigned allowing a position for a new leader in the UK to continue Brexit.
You can read our previous article bias where we called the GBP weakness.
Currency Strength Meter Quant Scores
The fundamental quantitative scores for GBP take into account various economic releases to score the economy on strength or weakness. Uncovering the intrinsic value of the asset is a core step in choosing what currency to trade. Recently, the Macro Currency Strength Meter (MCSM) scores showed weakness between 18-05-2019 and 21-05-2019. However, since the 22-05-2019 we're starting to see some strengthening signs after the weakness called last month.
The scores themselves were at a negative score of -7 on the 19-05-2019 however since then it's increased to +10 with the highest point being +24. This is a great positive upside shift for the GBP on fundamental level. Right now we could consider majority GBP pairs in our long portfolio as long as they align with the other factors in our analysis.
We are now towards the end of Q2 of the year, with a stronger outlook than previously in Q1.
That's our fundamental outlook wrapped up as of 26/05/2019 showing a strengthening Pound.
Now that Theresa May has resigned as Prime minister we could see a catalyst towards sentiment in the Hedge fund industry and commercial positions in the market.
Interestingly, commercial dealer positions have started to ramp up (85% long), Asset managers are still holding majority short positions (57% short) and Hedge Funds are still majority long (61%). Interestingly, the open interest has remained strong at 1.2% showing new positions are being added to the market meaning the trend is strong towards the downside. For us to line up sentiment analysis with the overall market trend we'd like to see open interest decreasing as that would mean the downtrend is coming to and end and a reversal is imminent.
The in depth view of the positions over the past year show how last month participants were very uncertain of the outcome with volatile COT readings. Now that most the uncertainty is over participants are starting to ramp up positions once again.
Overall, COT readings are suggesting the downtrend is still strong on the price chart. Meaning, if we want to align our positions with commercial longs for a long bias with our fundamentals we'll have to wait on a declining open interest.
Once we start putting everything together we're now going to move towards the price chart to get a picture of market direction and major levels to be concerned with. Overall, fundamentally we're looking towards a long bias at this current moment, this may change in the future if fundamentals no longer support this decision.
As we can see from our previous out look in April the price dropped significantly down towards 127 from 130. Now, the price itself has reached a significant area of buying. Last year in December between 127 - 125 buyers pushed the GBP higher towards the 133 region.
We can now see signs of support after a couple months of downwards momentum. On a technical level, it's reaching a relevant area to start buying the GBP. However, we're not going to jump in straight away. Overall, we have that long bias on GBP pairs but we still need to check fundamental against other pairs is it a viable long and are they in relevant technical areas of buying.
What we can expect from the BXP GBP index is the price to congest in this area for a week or two before seeing further signs. Waiting on the COT to line up with technical could be a good go sign as mentioned earlier we're still waiting on a decreasing open interest. Afterwards, if fundamentals hold we could see a GBP bounce back towards 133.
Overall bias: Strengthening GBP, waiting on further confirmations to get into long positions