Investors and economists do not currently have the best opinion on the British pound. Both assume a further decline in the value of the British currency. This is indicated by forecasts, positioning on futures contracts and fx options.
We have recently mentioned that the median expectations of banks from a survey conducted by the Bloomberg agency on the GBP/USD pair is 1.10 in the case of hard brexit. There were also forecasts that in the worst scenario GBP/USD may fall even to the level of parity, which has never been observed before. Not only the forecasts assume a pound fall, but also investors.
According to traders in the currency options market, investors are increasingly insuring themselves against further depreciation of the British currency. The cost of such insurance is steadily increasing. For the time horizon of one and up to two months, it is the highest since April this year. For the three-month options, the cost of insurance against the GBP/USD exchange rate drop in turn increased to the levels we observed in February and March.
Negative sentiment towards the pound seems to also prevail in the futures market. According to the latest CFTC data, speculators (leveraged funds) increased the short positions over long positions (net long positions) to levels unobserved since April 2017. The asset managers has also increased the short positions over long positions to a level unseen for at least a decade.
Leverage funds and asset managers net long positions and pound futures contract. Source: tradingster
Of course, in such a situation there may appear a group of investors with a contrarian attitude towards the market. If there is so much pessimism and the market is so focused on one-way trade, maybe the trend is nearing to the end? This, of course, everyone has to consider for themselves, while the topic of early elections in the UK and extension of the brexit deadline is increasingly being considered, which would be better for GBP than hard Brexit.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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