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Based on tactical considerations, the short-term is looking a little more constructive.
Strategists are picking up Pound Sterling on discount and looking to profit on some short-term relief.
Having been sold through July, the Pound started the new month attractively valued against some of its major rivals, including the Euro and Dollar. These pice developments triggered a buy signal on Crédit Agricole's positioning model, known as the G10 FX PIX 3.0.
It "signals that the GBP is oversold," says Valentin Marinov, head of FX research at Crédit Agricole.
"Subsequently, we have entered a long position in GBP/USD with a target of +4% and a stop loss of -2%. The model remains up 6.04% with a hit ratio of 69.70% over the past twelve months," he explains.
The Pound has edged higher against the Euro and Dollar over recent sessions, consistent with improved sentiment on global markets and repositioning ahead of Thursday's Bank of England policy decision, where a 25 basis point interest rate cut is anticipated.
Although the Bank is set to cut it will find limited leeway to alter guidance towards a quickening in the pace it cuts rates on account of the UK's still-rising inflation levels.
With the risk of a 'dovish' turn minimised, and the market having already 'priced in' up to two additional cuts, the central bank becomes less of a headwind to Sterling, and could even turn supportive if it sticks to its "cautious" approach to cutting interest rates.
Positioning has also turned more supportive in the wake of recent GBP declines, with market participants having steadily pared back upside exposure to the currency.
"GBP net positions have turned net short for the first time in 22 weeks, driven by an increase in short positions. The market is pricing in a full 25bp cut at the August 7 BoE meeting, bringing the target rate down to 4.00%," says Jane Foley, Senior FX Strategist at Rabobank.
Positioning is important as it can act as a headwind. For example, when the market is heavily invested in one direction, for instance, the upside, then that trade becomes crowded. This starts to act as a limiting factor on further upside, particularly in short-term time frames.
With positioning in Sterling now more balanced, and turning negative, it actually turns supportive. Think of it as a contrarian indicator.
Nevertheless, some technical strategists remain wary of the Pound, noting that the underlying setup remains challenging.
Tanmay Purohit, a technical analyst at at Société Générale, says GBP/USD encountered strong resistance near 1.3790 last month and subsequently developed a Head and Shoulders formation.
"The pair has broken below the neckline of this pattern, resulting in an extended decline that has stalled near the May low of 1.3130," he adds.
Purohit confirms that although "a brief rebound is underway... failure to reclaim the 50-DMA at 1.3500 may lead to a continuation of the downtrend."
The pattern’s projected target near 1.3000/1.2970 could be the next objective, he adds.
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