GBPUSD Short Trade Idea (Feb, 2021) Bank of England Negative Rates Coming!?

One of the key things about 2021 in the UK is that there's a huge vaccine programme being rolled out. This is to help tackle the on-going battle with the virus and at the same time get the economy in a a normal place again. It was forecast by the BoE that the first Q1 would be a contraction of 4% in the UK but as vaccines are rolled out, infections decrease and people start spending during spring we're expecting a bounce back in the economy.

On top of this one of the key indicators was the Bank's Monetary policy committee (MPC) kept interest rates in the UK at 0.1%. However, at the same time they've asked High Street Banks (Commercial banks) to be ready for negative interest rates...

Negative Interest Rates?!

BuT WHaT aBOuT mY SAVInGs...

Well ladies and gentlemen... that's why we all need to start learning about ways of investing our money. We're no longer in an interest rate environment with risk-free high returns on your savings, the negative interest rates will force consumers to spend, save less and invest more.

Lower interest rates also mean... a potentially lower currency value.

GBP/USD Short - High Level Fundamental Overview

Overall, the fundamental analysis is suggesting a potential downside move coming. One of the big factors in the analysis that is yet to agree is the import/ export analysis but also the hedge fund positions as we'll get onto later.

But for now... our out look on GBPUSD is to look for shorts.

Macro Currency Strength Meter

Starting off the analysis we always check the macro currency strength meter. This helps us filter out the market noise by condensing economic data into an easy to use strength meter. What it does is analyses various economic reports and generates a macro score each week. The direction of the strength meter helps show us potential future direction of exchange rates, if the macro score goes up we can expect strength and goes down we can expect weakness. Overall, filtering out any noise on whether we should be long or short we get an instant fundamental directional bias to focus on only short or only long positions.

The past few weeks have been very interesting in terms of the fundamental direction. USD has been on the rise... After sitting in a negative region since December USD has started to pick up some strength now in the positive 20s. On the flipside we started to see GBP congest in the negative region suggesting the economic data in the UK is still showing bearish signs overall.

Currently, the USD score is trending strength and GBP maintaining a weakness giving us the directional bias to look for shorts... now we need to do more analysis to see if other key indicators and economic reports suggest the same thing.

GDP Growth Differential Indicator

Overall, the GDP growth rates for the UK aren't looking great moving into 2022. We're expecting a rebound towards the end of 2021 as restrictions open back up but at the same time the US is doing the same thing. The overall net GDP growth differential change is showing a -2.5% change which is a bearish sign that the US is going to grow faster than the UK in the future.

These are forecasts made by the IMF which are generally quite accurate, it's always a good to keep an idea on the data to see if they update their forecasts.

Import/Export Analysis

Overall, the import/export analysis was one of the areas which didn't agree with the short side bias.

Oil is a major export in not only the US by the UK too. Therefore, there's no surprise GBPUSD has a 78% positive correlation with WTI. There was a positive growth of just over 8.5% which for the average volatility of the asset is just over the average positive. This overall means it's saying according to crude oil prices to long GBPUSD going against our short bias.

Ford Motor Company was another company included in the analysis for GBPUSD. One of the major reason to include is that Ford is one of largest car manufacturers in the US and also a domestic favourite in the UK. Ford having both a strong presence in the UK market and being a large car exporter in the US.

Overall, there was a 68% positive correlation with Ford and GBPUSD. The growth in Ford has been insane having now growing stronger than pre-pandemic levels. Could this be due to the monetary stimulus? Potentially, but again it goes against our idea to short GBPUSD.

Gold on the other hand is an export in which the UK holds dear. Surprisingly it manages a lot of Gold and a lot of high net worth individuals and organisations store their gold in the UK. There is however, a slight negative correlation with GOLD and GBPUSD... with gold looking to top out this is quite bullish on GBPUSD. Again, this is why our import/ export analysis disagrees with the idea due to not agreeing with our GPBUSD short.

Interest Rate Differentials

Overall, again the net interest rate differentials look bearish for GBPUSD with the interest rate differentials in the negative region. However, an important qualitative statement made by the Bank of England was telling commercial banks to prepare for negative interest rates. This is a huge bearish signal if it gets the go ahead and with the pre-emptive warning it looks likely.

FTSE100 Analysis - Domestic Stock Market Performance

The FTSE100 is starting to recover after the initial drop in March. The levels now are looking fairly bullish due to expectations that the vaccines are helping bring back consumer and business confidence. However, the stock market has yet to recover to pandemic levels... this means overall UK is looking poorer in comparison to the UK... bearish sign.

Hedge Fund Market Positioning

Overall, the positioning from hedge funds looks interesting. There's been a slight change in the hedge fund sentiment differential which is a great sign for the short! However, because the differential is overall in the positive region it means the open interest overall between GBP and USD is in favour of GBPUSD long.

I'd say currently it's a neutral bias.. since the actual differential is positive but it's looking to trend down.

Technical Analysis - Price Trends

The price charts are looking bullish with no current signs sellers are in control. However, it's starting to creep up to a level where sellers took control between 2018-2020. This might be the best region to short GBPUSD moving into 2021/22 assuming the fundamentals are in favour of the short side move then!

My personal outlook is wait on bearish technical signs before thinking about shorting GBPUSD, at the same time keep an eye on the fundamentals especially the macro currency strength meter and COT. - Matty, Logikfx

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