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  • Leveraged funds have maintained steady long positioning in the British pound (GBP) over the past month, with net GBP longs far exceeding longs in all other currencies. Asset managers have grown increasingly bearish GBP, almost doubling short exposure over the past month.
  • GBP/USD has traded between ~1.25 and ~1.29 year-to-date (YTD), currently sitting near the bottom of this range. CME Group data on option strikes suggests markets favor GBP downside.
  • The FX volatility curve using CME Group options data suggests investors are calmer than throughout 2023, with sentiment stable at calm levels in recent weeks.

GBP/USD traded sideways in a ~1.2600/1.2750 range in January before slumping to a YTD low just above 1.25 in early February. From mid-February to early March, the pair rallied to a YTD high just below 1.29. In the past three weeks, GBP/USD has slumped, gaining momentum in recent days to trade to ~1.2550, nearing the YTD low. More hawkish monetary policy expectations for the U.S. Federal Reserve (Fed) drove this dollar strength versus the pound.

Leveraged funds have maintained relatively steady long GBP exposure. They remain net long of 27.1K contracts, versus a long position of 28.2K contracts a month ago (Chart 1). Additionally, JPY shorts have remained a standout, and EUR shorts have more than doubled in recent weeks.

Meanwhile, asset managers have become much more bearish GBP, almost doubling short exposures over the past month from -32.9K contracts to -61.7K contracts (Chart 2). Asset managers are still very long EUR, albeit slightly less than at the end of February. Meanwhile, JPY shorts remain in favor, with asset managers increasing them in recent weeks.

Macro Hive Take: GBP/USD has been in a relatively tight ~1.25/~1.29 YTD range. In the past few weeks, the rise in U.S. yields has driven GBP/USD weakness. We think this can continue in the coming days, with the U.S. CPI report on  April 11 is very important for direction. Beyond this near-term event risk, we think that the YTD range in GBP/USD will probably hold. 

Option strikes

Investors see GBP/USD downside as more likely than upside. According to CME Group data on option strikes:

  • There is net demand for GBP/USD calls at 1.22, with slightly more near 1.21 (Chart 3).
  • In contrast, there are much bigger clusters for downside demand between 1.23 and 1.25, with additional material downside demand at 1.21. This means there is much more notable downside demand in aggregate.

What to watch: In addition to the U.S. CPI report on April 11, the key events for GBP/USD are U.S. PPI (April 11), US retail sales (April 15), the UK employment report (16 April), the UK inflation report (April 17), UK retail sales (April 19) and U.S. core PCE (April 25/26). 

FX investor risk appetite

CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite. We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm markets. The latest data finds:

  • The FX volatility curve currently remains at steeper levels than throughout 2023 and has tracked sideways in recent weeks (Chart 4). This suggests investors remain calm, likely because economic growth has stabilized and conviction remains that easier central bank policy is coming this year.
  • The move aligns with CME Group’s CVOL volatility indices, which have followed a similar dynamic to trade near year lows.
  • Outside FX, equity volatility remains historically low, while rates volatility remains historically high.

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.


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