By Rob Samson
As the below analysis of the current price action shows, the sell-off can be attributed to market participants being forced out of the markets on the back of the sudden slump:
"The GBP/USD broke through the 1.6420/00 support area, triggering stops and sliding to its lowest level in a week at 1.6360 so far. At time of writing, the Cable is trading at the 1.6365 area, recording a 0.7% loss on the day. The GBP is among the worst performers against the dollar, having erased Friday's gains despite the greenback remains weighed by weak NFP data," says a comment on the matter issued by FX Street.
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This appears to be a classic squeeze - this happens when a large number of market participants are forced to close their GBP/USD trades as a sharp move in the market sees their stop loss orders hit.
The resulting selling of GBP accelerates the decline dragging more traders into the move; while the move does not reflect fundamentals it has the ability to alter perceptions to sterling and could well call a close on the recent rally.
While Friday’s US employment data report was not as weak as the headline payroll rise of 74k suggested, it will be hard for the USD to shake off the weakness that resulted until after the FOMC meeting on January 28th.
Ahead of the employment report, the market was assuming that the Fed would announce a further $10bn of QE tapering at this meeting, but some doubts have emerged following the report.
"In practice, we expect the Fed will carry on tapering, as the employment data may well have been weather affected and is unlikely to deflect the Fed from its path in the absence of other evidence of economic weakness. USD weakness should not be extended far from here, with some support for the USD index in the 80.25 area," says a note from Lloyds Bank.
Anders Vestergård Fischer at Danske Bank notes that the Yen was able to make strong gains against the USD on the back of Friday's data and stands to recover further:
"The yen was supported and USD/JPY was pushed below 104. The market is already extensively speculative long USD/JPY, even though the CFTC data released on Friday showed that investors in the week ending 7 December actually cut back slightly on short JPY-positioning.
"The setback in the cross might have further to run this week due to still stretched speculative
positioning and the recent improvement in Japanese data that at least short term might create speculations that BoJ will not step-up monetary easing in 2014. "
For now though the story remains the sudden fall from grace of the GBP.
It will be a while yet before the currency is able to recover.