Pound Drops On Hung Parliament Surprise, Dollar Doubts Remain

Is there value to be found at the current price of Sterling after the UK election stripped UK PM Theresa May from a strong negotiating base going into Brexit talks with EU? That question is yet to be answered, but looking at retail sentiment and fundamental views you would come up with two different views. As you’ll see below in greater detail, retail traders have been aggressively buying GBP after the largest sell-off since Brexit and of 2017. However, the uncertainty that will now cloud the Brexit negotiations could set up a longer-term slide like we saw in H2 2016 in Sterling.

When looking at the charts, cable (along with other markets like the Nasdaq) are working on a bearish outside week where the intra-week high was above last week’s high, but the close of the current week is below last week’s low. In other words, an aggressive bearish shift of sentiment has taken place. Next week, the focus will be on swings in the politics and whether the BoE policy meeting on Thursday mentions increased uncertainty though we can be assuredthey're thinking it if nothing else.

On the positive side, CAD employment gave the commodity currency a boost where Oil has not been able to recently. Full-time numbers crushed expectations with 77k full-time jobs added. The headline was also encouraging at 54.5k jobs added vs. 15k expected, but the details of full-time jobs were more promising than the headline after last month’s data was overshadowed by mainly part time jobs adding to the headline number. On the charts, the strong fundamental print took USD/CAD close to key support at the May low of 1.3389.

Lastly, a point worth keeping an eye on since central banks do is the falling bond yields, which would indicate a drop in inflation and likely growth expectations. Bank of America Merril Lynch put out a report showing that they saw the largest bond-buying inflows in 122-weeks, which helps to show that money is being sent toward havens and less toward growth assets.

While short-term movements are not worth predicting, a resumption lower would argue that the Federal Reserve got ahead of themselves with forecasting three hikes in 2017. Inflation expectations have pushed to 2017 lows, and Eurodollar calls on the CME per Bloomberg have been aggressively bought, which would align with an expected dovish Fed in 2018. Luckily, on Wednesday, we’ll get an understanding of the Fed’s outlook, and volatility has been hard to come by, we could get week’s main share of volatility at2pm ET next Tuesday.

Closing Bell’s Top Chart: June 09, 2017, EUR/GBP comes into multi-month resistance after UK vote

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Next Week's Main Event: USD Federal Open Market Committee Rate Decision (JUN 14)

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GBPUSD: Retail trade data shows 47.5% of traders are net-long with the ratio of traders short to long at 1.11 to 1. The number of traders net-long is 25.8% higher than yesterday and 40.9% higher from last week, while the number of traders net-short is 8.4% higher than yesterday and 10.8% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. Traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower although the fact traders remain net-short.(Emphasis mine)