Why Are Traders Dumping the GBP?
The GBP/EUR currency pair shed 0.02%, or €0.0002 to trade at 1.0796 against the EUR on Monday, August 28, 2017. The performance of the GBP/EUR has been significantly bearish in 2017, plunging from 1.2031 to its current level in barely 8 months. The GBP/EUR is trading well beneath its 50-day moving average of 1.118, and it’s 200-day moving average of 1.156.
The trajectory of the GBP appears headed towards parity with the EUR. On August 23, 2017, the GBP plunged to an 8-year low on the back of strong economic performance from European industry. The European PMI figures reached 58.1 during August, significantly higher than the 50 level which indicates an expansionary sector.
The EUR has been gaining consistently against the GBP since May when it was trading around £0.84. Now, it is fast approaching the £0.93 level and rising fast. We have seen virtually uninterrupted gains in the EUR against the GBP. Driving the performance of the EUR is the German economy. Despite fears to the contrary, output expansion continues in earnest in Germany, and this is weakening the GBP.
A stronger EUR is a disincentive to export-related trade. However, the optimism shared among EUR bulls is seeing higher levels of demand for the currency, and less interest in the GBP. Several days ago, the GBP/EUR pair was trading at 1.0853, and it has continued dropping since then. Overall, the EUR has appreciated by some 7% against the GBP in 2017, and this is slated to continue as long as that strong negative downtrend persists.
Brexit Fears Weigh on the GBP
The euro zone recovery has outpaced that of many competing economies. Several important political results, notably the French presidential elections have boosted confidence in the EU, and the collectivist-style nature of European politics. This business-friendly outcome has increased growth expectations in the EU.
The effective exchange rate of the GBP has declined, owing to the decreased purchasing power of the GBP. By the start of the trading week, the GBP was under pressure again. According to the US Commodity Futures Trading Commission (US CFTC) an estimated $1.1 billion was wagered against the GBP for the week. This brings outstanding net short contracts against the GBP to $3.7 billion.
Of course, Brexit uncertainty continues to feed the short-selling on the GBP. Recent comments by Labour leader Jeremy Corbyn that he prefers a soft Brexit approach to the UK/EU deal have complicated matters somewhat. Gross short positions on the GBP added $0.9 billion worth of short-sells, while GBP Bulls reduced their long position on the currency by $0 .2 billion. Over the past 5 weeks, traders have adopted a net-short position on the GBP.
GBP and JPY Subject to Short-Selling
The Japanese Yen (JPY) has also seen significant short-selling taking place against the USD, according to Scotiabank FX Srategy, Bloomberg & Commodity Futures Trading Commission. Of all the currencies currently surveyed, the EUR enjoys the greatest net long position among traders and speculators. Current figures indicate the net long position on the EUR is $12.9 billion, with gross longs rising $1.2 billion week on week.
Over the past week, the GBP/EUR pair has hit 8-month lows, and 8-year lows. Currently, the GBP is being oversold in markets, yet it remains fundamentally strong. The EUR appears to be stretched by traders and speculators, and wagers on the EUR are increasing.
Why do you think the EUR is so bullish right now? Why is the GBP moving towards parity with the EUR? Do you think a soft Brexit is good for the GBP?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.