Sterling Price Outlook: GBP/USD Remains Bearish on Rallies

[MongiIG]

GBP/USD Analysis and News:

• First Signs of a De-Escalation Trade, Outlook Remains Highly Uncertain
• GBP/USD Client Sentiment Data Signals a Bearish Outlook

First Signs of a De-Escalation Trade, Outlook Remains Highly Uncertain

Aside from the US announcing that it will ban oil imports from Russia, who were also partly joined by the UK. The main headline overnight had been reports that the Ukrainian President is no longer insisting on NATO membership, which had been among Russia’s key reasons for invading Ukraine. Additionally, the Ukrainian President also hinted that he was open to a compromise on the status of two breakaway pro-Russian territories. In turn, today’s relief rally appears to be the first signs of a de-escalation trade with equities notably firmer, meanwhile gold and oil prices are under pressure. However, as has been made abundantly clear, headline risk remains elevated with market sentiment able to change on a whim from headline to headline. Moreover, while talks perhaps maybe showing slight signs of a moving in the right direction, gauging the timing of a breakthrough remains incredibly uncertain.

That being said, while the Euro has seen a modest reprieve with the single currency edging back towards the 1.10 handle, the bias remains bearish on rallies. The same can be said for the Pound, which will struggle in an environment of stagflation. In light of the current backdrop, the Bank of England’s most recent inflation forecast already appears outdated amid the latest surge in oil prices. For now, short-covering and technical support in the form of the 200WMA is underpinning GBP/USD, but risks remain lower for a test of the 1.3000 handle.

GBP/USD Chart: Weekly Time Frame

Source: Refinitiv

GBP/USD Client Sentiment Data Signals a Bearish Outlook

Data shows 73.46% of traders are net-long with the ratio of traders long to short at 2.77 to 1. The number of traders net-long is 1.64% higher than yesterday and 9.33% higher from last week, while the number of traders net-short is 12.70% lower than yesterday and 23.22% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias.

How to Trade the Impact of Politics on Global Financial Markets