GBP/USD awaits month-end flow positioning into key events in March

• GBP long positions have recovered almost to their January highs.
• GBP/USD unable to rally on dollar weakness, is that telling?
• GBP/USD subject to a long squeeze on trade talk uncertainty and the UK budget. 

GBP/USD has been trading between a low of 1.2886 and 1.2954, slightly down on the day by 0.22% and despite the US dollar sliding into the lows of the 99 handle. At this juncture, it’s all bout March and month-end flows could be one to watch as traders position ahead of key events. 

First of all, the US dollar has been taking up the headlines, besides the coronavirus, and has been in a whisker of the psychological 100 handle in the DXY index (heavily weighted to the euro). The slide came on Friday following dismal US data having pushed higher for a fourth consecutive week in long futures positioning.

Given the robustness of the US stock markets and the US economy and global mark uncertainty, the dollar has been sourced as a store of value this year so far for many investors. That is unlikely to change on one data set, so the pullback is most likely temporary and healthy correction. The markets would need to see a far more dovish Federal Reserve or a continued deterioration on very important data, such as this week’s PCE. 

However, besides data, the coronavirus is a real threat to the Fed, although it has not been showing up in data as of yet and while we have seen a wobble in stocks, they are still only 4% away from the all-time highs – it may take a much larger decline to see the Fed reactive.

“Ongoing coronavirus fears have led to a sharp repricing of 2020 Fed rate cut odds, driving investors to price in 56bp of rate cuts compared with just 34bp two weeks ago,” analysts at TD Securities explained, adding, “In recent days the sharp repricing of Fed rate cut odds has been driven by the spread of coronavirus outside of China — particularly to Italy and South Korea. This has shocked global equities, leading investors to price in more Fed cuts.”

GBP bulls beware

As for the pound, it is really all down to business sentiment at this juncture, with respect to EU/UK trade negotiations and what stimulus can be expected from next month’s budget.  We witnessed positioning rising on the back of rising fiscal stimulus expectations following the reshuffle in the UK Government. However, long-squeezing on any disappointments in the budget and or formal UK-EU trade negotiations that also kick off next month is a real risk for bulls. 

“GBP long positions have recovered almost to their January highs on the hope that the new Chancellor of the Exchequer will unleash a significant fiscal boost,” analysts at Rabobank explained. “Although the market is judging that the new Chancellor’s fiscal position could imply that BoE rate cuts are less likely, the tension surrounding forthcoming talks between the UK and the EU on their future relationship could still undermine GBP.”

GBP/USD levels