Looking at the most recent COT numbers over the weekend, we noticed there was a sharp reduction in the short interest of the British pound. Last week the specs were short almost 50K contracts, but those positions were reduced sharply to a little over 22K in the new report.
The strong Monday rally in the GBPUSD, above 1.5970, and the failure, so far, to retrace this move has caught out attention. Looking back at the COT reports, we notice specs have been consistently short the pound since August of 2011. Further, the 22K current short position is the smallest short since 10.2K revealed in the September 6th report. Is it possible this pair can conquer the 1.60 handle, chase out the remaining shorts, and then entice the trend followers to get long?
The pound has this schizoid relationship with the euro. As Britain's biggest trading partner, a strong economy on the Continent benefits the Brit's economy. Recently the euro debt problems has hurt their economy, causing trade with the Continent to slow. Tomorrow, the final British Q/Q GDP Report is expected to show a negative 0.2%, not a positive for the pound.
On the flip side, the pound has benefitted because it is not the euro. Just as the Greeks moved money out of Greece, fearing the worse, there has probably been a movement of scared money out of Europe and the Middle East to Britain.
The British recovery has been muddling along, handicapped by tax increases on an economy already heavily taxed, and government spending reductions. Fundamentally, it is hard to conclude the pound is a buy, but markets sometimes make their move prior to revelation of the fundamentals.
London, perhaps, is different from the rest of England, but friends and relatives who work and visit there report bustling activity. Also, the summer Olympics begins in July. Will this not give their economy a boost?
Looking at the GBPUSD chart, should the market hold above the 1.59 level, we will then see if it can maintain the momentum and overcome the psychological resistance at the 1.60 level. But what then? The October 31 2011 high of 1.6165 would be within reach. The next target would be in the 1.66 area, and that seems like a stretch.
In trading pairs, one of the basic rules is to go with the trend, buying the ones that appear the strongest and sell the weakest. I have included at the bottom the daily and weekly charts of the pound versus the yen. The daily chart certainly confirms the trend in the pound is up, having moved from 118 to 132. The weekly chart shows a great W bottom, with a target in the 1.39/40 area, but if you look at a monthly chart, 1.60 is a longer term target. As always mind you risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.