Is GBP’s Strength Starting to Crack?

Is the GBP strength going to be short-lived? 

The Great British Pound has remained a fairly strong currency, however is that all about to change? 

Data out of the UK over the past month has continued to be poor, although the market seems to be bullish GBP’s. Last week the currency jumped from -2 to -1 after a recent move from +5 to -2 on the currency strength meter. 

So there are signs of some weakness coming through for the GBP, especially against the currencies that are getting stronger like the NZD, AUD and even the EUR. However, when we look at it against the USD, the GBPUSD price had reached a significant high of 1.3400. 

Could this be an area of reversal though? 

Today the UK manufacturing and services PMI’s were released with both showing frailties. Services PMI in particular showed a decline from 52.5 to 48.9, this shows a contraction within the services sector and could highlight poorer business conditions moving forward. 

This isn't the only data which highlights the slowing UK economy. 

When I take a good look at the fundamental tracker, we can see that there’s a lot of red on the board. This is showing us that most of the UK data coming out has missed forecasts on the negative side. 

The only positive data points were the most recent retail sales data, which showed a significant climb from the previous month, and GDP growth rose unexpectedly. If these data points begin to crack as well then there could be a surge in GBP weakness, as the Bank of England would more than likely cut interest rates. 

Today the International Monetary Fund (IMF) announced that they expect the Bank of England to cut interest rates three times this year. Sighting higher inflation rates, slower growth and uncertainty surrounding the US trade tariffs and the main drivers. 

A big problem rests in this statement as the definition of stagflation is higher inflation and zero or slower growth. Stagflation causes problems because if the BoE acts and brings rates down, it could re-ignite inflation. But the BoE may be left with little choice. 

They see inflation spiking this year due to higher bills including energy and water. However, they see this being a short term problem, as restrictions by the Labour government which include higher taxes and lower government spending could stall inflation. 

Sentiment Analysis

When I take a look at the commitment of trader reports we can see that the hedge funds have been actively shorting British Pounds for the past four weeks bringing contracts from 44,283 down to 6,509. 

Why would the hedge funds be shorting the British Pound so much compared to the other currencies and markets. 

It could be that the BoE hasn't cut rates as much as other central banks and the market sees them being the next to bring rates down. 

This is also the pricing in the bond market, UK 2 year government bond yields are trading around 3.9% that’s 0.6% away from current interest rates at 4.5%. This could also tell us that the market anticipates at least two cuts from the central bank. 

Combining all this information together I can see that the GBP could be weaker and I am actively looking for short opportunities against the stronger currencies.

GBPUSD Outlook

We know that the USD is also a weak currency but I do think that the ‘sell USD’ has reached a slight oversold level and the market could look for a short term reversal. GBPUSD reached the September 2024 highs and was rejected. This could be the start of the reversal in the short term back to the support of 1.3000. The weekly chart highlights how far the price has moved away from the 50 moving average adding to the idea that the price could reverse. 

GBPJPY Outlook

I also like the look of this weekly GBPJPY chart, the price is in a downward trend but we are in the secondary phase. This means the price is currently going against the overall trend. The last three weeks the price is slowly pulling back, which could signal further downside. This market may become tricky to trade in the short term, as I can also see the case for short term weakness in the JPY. But if the JPY strength holds overall then short ideas on this market makes sense to me. Even if the price trades towards the resistance of 194.50.

So, is the recent strength in the GBP just a blip before another leg lower? The signs are certainly pointing that way. We’ve got weaker data filtering through, the IMF predicting multiple rate cuts, and hedge funds offloading GBP positions aggressively over the past month.

Even though the pound has held up in certain areas like pushing higher against the USD, it’s starting to show cracks, especially when compared to stronger currencies like the NZD, AUD, and EUR. The fundamentals just don’t seem to back the recent bullishness, and if retail sales or GDP numbers start to roll over, we could see a much more significant move lower.

With bond markets pricing in rate cuts and the BoE backed into a stagflationary corner, the risks to the downside are growing. I’ll be keeping an eye on short opportunities across GBP pairs, especially if the technicals line up with this macro backdrop.

For now, it feels like the pound’s strength might not last much longer.