GBP/USD PRICE, NEWS AND ANALYSIS:

• GBP/USD continues to find it difficult to break convincingly above 1.38, which is not just providing “round number” resistance but is also where an important trendline checks in.
• The latest UK public sector net borrowing (PSNB) figures were better than expected in September but haven’t changed expectations of an imminent UK interest rate increase.

GBP/USD STRUGGLING WITH RESISTANCE

GBP/USD continues to find it difficult to break convincingly above “round number” resistance at 1.38, which is also where a downward-sloping trendline connecting the recent lower highs checks in.

GBP/USD PRICE CHART, TWO-HOUR TIMEFRAME (SEPTEMBER 30 - OCTOBER 21, 2021)

Source: IG (You can click on it for a larger image)

BULLISH OUTLOOK FOR GBP

Nonetheless, GBP is still well underpinned by market expectations that the Bank of England’s monetary policy committee will increase UK interest rates next month. According to overnight index swaps (OIS) prices, there is an 80% chance of a 25 basis point rate rise being agreed when the MPC next meets on November 3/4 and publishes its monetary policy report.

That expectation has not been changed by the latest UK public sector net borrowing data for September, excluding public sector banks, that show a smaller than expected deficit of £21.8 billion, better than the £22.6 billion forecast by analysts but worse than a revised £16.8 billion in August. It was still the second-highest September figure since monthly records began in 1993.

The data are unlikely to change expectations for the UK budget and spending review due on October 27. Chancellor of the Exchequer Rishi Sunak will likely announce several measures to try to balance the books after spending billions to lift the economy from the downturn caused by the Covid-19 pandemic.

BULLISH SENTIMENT SIGNAL FOR GBP/USD

Turning to sentiment, IG client positioning data are sending out a positive signal for GBP/USD. An analysis of the positions of retail traders using the company’s platforms shows that 44.61% of them are net-long, with the ratio of traders short to long at 1.24 to 1. The number of traders net-long is 0.46% higher than yesterday but 16.42% lower than last week, while the number of traders net-short is 7.24% higher than yesterday and 1.12% higher than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may rise. Moreover, traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.

Written by Martin Essex, Analyst, 21st October 2021. DailyFX