GBP/USD Weakness May Persist

GBP/USD is continuing to slip back within a downward-sloping channel on the hourly chart (see below) that has been in place for the past fortnight. Moreover, it is now sitting on the support line of a longer-term channel on the daily chart, and if it breaks through then further losses are likely, perhaps to the 1.32 level initially.

GBP/USD Price Chart, Hourly Timeframe (Nov. 17 – Dec. 2, 2021)

(Click on image to enlarge)

Image Source: IG 

Omicron Jitters, Hawkish Fed

Behind the weakness in GBP/USD lie fears that the Omicron variant of the coronavirus is still spreading. The first case in the US has now been discovered, and that has knocked back risk sentiment throughout the financial markets.

Moreover, Federal Reserve Chair Jay Powell seems to be taking a more hawkish view of US monetary policy, reiterating Wednesday that the Fed will likely taper policy faster than previously expected now that it has dropped the word “transitory” from its view of inflation.

The central bank will therefore consider a faster tapering of its bond-buying program when it meets on December 14/15, and that could lead to earlier interest rates increases. Cleveland Fed President Loretta Mester indicated in an interview Wednesday that she expects two 25 basis point hikes next year.

Retail Traders Net Long GBP/USD

Turning to positioning, the latest IG client sentiment figures show that a large majority of retail traders remain long the pair. The data show 74.22% of traders are net-long, with the ratio of traders long to short at 2.88 to 1. The number of traders net-long is 3.80% higher than yesterday though 9.62% lower than last week, while the number of traders net-short is 2.84% higher than yesterday but 9.52% lower than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD may continue to fall. However, positioning is more net-long than yesterday but less net-long than last week, and the combination of current sentiment and recent changes gives us no clear GBP/USD trading bias either way.