Sterling Reinforces Range Trading Tendencies

Pound Sterling News and Analysis

• Cable maintains non-directional posture as markets hold out for more hikes
• Large speculators maintain net-long positioning via the CoT report
• EUR/GBP trading range heads towards support as ECB concerns pick up
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Cable Maintains Non-Directional Posture

Since breaking below of the longer-term uptrend, GBP/USD has struggled to build on the move to the downside while exhibiting multiple challenges to trading higher too. The sideways trade is largely reflective of where both central banks (Bank of England and the Fed) are in their respective hiking cycles – neat the peak.

With interest rates largely moving lower (core and headline CPI), central banks are faced with the option of ending rate hikes and potentially run the risk of not doing enough, or hike and risk over-tightening, sending the economy into contraction. Other scenarios have been entertained like the ‘soft landing’ in the US where the Fed can tighten without negatively impacting the economy, but essentially moves from policy makers will be influenced by current data meaning the predictability of future decisions becomes less certain than before.

GBP/USD looks to have found support at 1.2585 – a level that provided a pivot point in April and June (highlighted in purple). With prices trading above the 200-day simple moving average, levels to the upside remain constructive. Once such level is 1.2676. Support lies at 1.2585 and the 200 SMA which appears around 1.2420.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

For GBP/USD bears, something that has developed as a risk to the downside is signs of weakening US data which started with the downward revision of Q2 GDP. Survey data via the July ISM services PMI report showed new orders slowed, as did business activity/production. US services PMI is due this week as the only high impact scheduled event across the two currencies.

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Something that continues to underpin sterling is interest rate expectations. Markets still anticipate the chance of two more 25-bps hikes this year, with an 86% chance of a 25-bps hike later this month with another one before June next year. This stands in the way of GBP/USD downside especially at a time when further Fed rate hikes look more and more unlikely – erasing support for the dollar.

Implied Interest Rate Probabilities

Source: TradingView, prepared by Richard Snow

Speculative positioning according to the Commitment of Traders report reveals that speculative net positioning remains long sterling. These are large profit-seeking speculators like hedge funds that have to disclose their FX exposure to the CFTC.

Pound Sterling Speculative Sentiment for the CoT Report

Source: TradingView, prepared by Richard Snow

EUR/GBP Trading Range Heads Towards Support

EUR/GBP has traded broadly between 0.8515 and 0.8650 and after trading below 0.8565, now trades towards 0.8515. The European Central Bank (ECB) has issued concern over recent economic data that has been worse than initially expected – lowering the possibility of further hikes into the end of the year.

Markets still anticipate one more 25-bps hike before the end of the year although changes of a hike at this month’s meeting is unlikely.

EUR/GBP Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX