GBP/USD Analysis: Commitment of traders report (COT) - 24th July 2023

A standout observation from last week’s COT data is the weekly change volumes among some of the FX majors, gold and silver. Whilst net-long exposure to GBP/USD futures rose to a 15-year high, gross-short exposure increased at its fastest weekly pace since November 2021. Net-short exposure to JPY/USD futures fell at their fastest pace since March 2020 (the pandemic low for risk assets), whilst net-log exposure to EUR/USD futures increased at their fastest pace since March 2020. Open interest also increased at its fastest pace since that milestone time.

Bulls returned to snap up gold and silver following the weaker CPI report from the US. Managed funds increased gross-long exposure to silver futures by nearly 50% last week, and also pushed net-long exposure to gold to a 66-week high.

For yet another week we see extreme readings for GBP and 2-year note futures. GBP/USD remains at its 100% percentile over the 3-month, 1-year and 3-year periods which means it is the most bullish positioning over those timeframes, whilst the 2-year note has achieved the same with 0% percentile (most bearish over those timeframes). And that suggests a sentiment extreme for both markets which raises the potential for a reversal at some point in the future.

We also note that large speculators have increased their gross-long positioning to VIX futures to suggest they expected increased volatility over the next 30 days, which has seen net-short exposure fall to its least bearish level in 14 months.

Commitment of traders (forex) – as of Tuesday 18th July 2023:

• Large speculators increased net-long exposure to EUR futures by 38.7k contracts (most aggressive bullish repositioning since March 2020)
• Traders reduced net-short exposure to JPY futures by -29.9k contracts (most aggressive level of short covering since March 2020
• Whilst net-long exposure to GBP rose to a fresh 15-year high, gross-short exposure rose at its fastest weekly pace since November 2021 (+33% w/w)
• Net-long exposure to US dollar index futures (DXY) fell to a 9-week low

GBP/USD weekly chart:

We have been highlight the extreme positioning on GBP futures for several week, so it is interesting to note that spot GBP/USD prices formed a 2-bear bearish reversal pattern on the weekly chart (dark cloud cover). Whilst it may or may not turn it to mark a major swing high, it certainly shows that sentiment is changing despite net-long exposure reaching a fresh 15-year high. Gross shorts were also increased by 33% last week to underscore that sentiment could be changing for the extended pound rally.

GBP/USD daily chart:

If we switch to the daily chart we can see GBP/USD fell for six consecutive days, which is a bearish sequence not seen since September and therefore hints a bullish day (at the minimum) could be approaching.

Friday’s doji shows that bearish momentum is waning, it closed above the 1.2848 and was accompanied with an oversold RSI (2). From here, we suspect prices will try to recoup some of last week’s losses and head towards 1.300.

• A break above Friday’s high assumes a move towards 1.300
• The bias remains bullish over the near-term whilst prices hold above Friday’s low
• A hawkish FOMC meeting could see gain caps and produce its next leg lower
• A break above 1.3000 assumes a retest of the prior week’s high

Commitment of traders (indices, bonds) – Tuesday 18th July 2023:

• Net-short exposure to the 2-year note has hit a fresh record high, with gross-longs being trimmed for a third week (which implied higher yields at the short end of the curve)
• Net-long exposure to Nasdaq 100 futures was barely positive and at its least bullish level since April
• Gross-log exposure to DJI futures pushed net-short exposure to its least bearish level since February

Commitment of traders (commodities) – Tuesday 18th July 2023:

• Net-long exposure rose to a 10-week high among large speculators and a 66-week high among managed funds
• Net-long exposure to silver futures rose at its fastest weekly pace since June 2018, with gross-long exposure being increased by 49% by large speculators
• The combination of trimmed shorts and increased longs saw net-long exposure to WTI futures rise by 18.8%

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