"Sentiment follows price” is a common nugget ‘O wisdom you hear on trading floors" - Spectra Markets.

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The Pound rose against a softening Dollar and many other currencies in midweek trade but data detailing the activities of traders suggests that its recent buoyancy at least partly reflects speculative interest reaching extreme levels, which may indicate limit scope for further upside in Sterling and a heightened risk of corrective losses ahead.

Sterling was among the best-performing currencies in the G10 and G20 baskets on Wednesday as the Dollar fell widely while stocks and some government bonds edged higher as the markets looked ahead to the release of U.S. business surveys and the Federal Reserve's (Fed) latest interest rate decision.

Wednesday's gains helped the Pound to remain near the top of the major currency rankings for the recent week but analysis of recent Chicago Futures Trading Commission (CFTC) data covering the Commitments of Traders indicates that Sterling could struggle to extend its recent advance and may be at growing risk of a corrective setback.

"All five positioning metrics showed accumulation of GBP this week; a 5-for-5 sweep is a rarity," says Brent Donnelly, president at Spectra Markets and a veteran currency trader with a career spent at hedge funds and a long list of major banks including HSBC, Lehman Brothers and Nomura.

Source: Spectra Markets.

“Sentiment follows price” is a common nugget ‘O wisdom you hear on trading floors, so it’s worth noting the exact opposite has happened with GBPUSD of late," Donnelly adds in Tuesday's edition of the am/FX daily macro mailout.

The latest data suggests traders have recently turned 'net long' with bets in favour of the Pound, making for the least bearish outlook among speculative traders since before the Russian armed forces began their full-scale invasion of Ukraine in February last year.

GBP/USD Forecasts Q2 2023 Period: Q2 2023 Onwards Details: Consensus institutional forecast targets + max & min targets. Contributors: Citi, Barclays, Morgan Stanley & more Provider: Global Reach Type: Free Download Please Access Here

Meanwhile, the Pound has reached its highest level against the Dollar and some other currencies including the Canadian, Australian and New Zealand Dollars since roughly the same point while also returning to its October 2022 highs against the Japanese Yen.

Each of the latter have also been among the biggest underperformers of late, both on the market and in terms of the speculative sentiment reflected in the CFTC figures.

Source: Spectra Markets.

"This information isn’t actionable after the fact, but it’s worth staying on high alert in future for other examples of this. It has worked many times over the years in EURUSD, too, where positioning turns, and price follows," Donnelly says.

Sterling gave ground to the Japanese Yen and Swiss Franc while trading neck-and-neck with the Swedish Krona and Norwegian Krone going into Wednesday's Fed decision but it continued to edge higher against the Canadian, New Zealand and Australian Dollars.

GBP/CAD Forecasts Q2 2023 Period: Q2 2023 Onwards Details: Consensus institutional forecast targets + max & min targets. Contributors: Citi, Barclays, Morgan Stanley & more Provider: Global Reach Type: Free Download Please Access Here

But to the extent that CFTC positioning is a contrarian indicator of the outlook, Spectra Markets analysis might reflect an emerging vulnerability for Sterling in relation to the U.S. Dollar, Canadian Dollar, Australian Dollar and Japanese Yen while potentially suggesting a positive or otherwise neutral outlook in relation to the Euro and Swiss Franc.

"We had nearly a 100% chance of a June hike priced before Silicon Valley Bank imploded, then 100% chance of a cut soon after. Now, we are crawling back towards the hike side of the ledger again. Right now, interest rate markets have a 34% chance of a Fed hike priced in for June," Donnelly writes.

Source: Spectra Markets.