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Thirteen trading days have now past without a meaning rally in the GBP/USD. This is the longest stretch of weakness that we have seen in sterling since August 2008. The currency pair has obviously become deeply oversold and now everyone is wondering if GBP/USD is due for a recovery. From a fundamental perspective, we think further losses are likely because next week’s U.K. economic reports should reinforce the weakness that kicked off the decline in the currency. U.K. data took a turn for the worse in mid July prompting the Bank of England to tone down their hawkishness and speculators to abandon their long positions, which hit 7-year highs on July 1st. According to the latest CFTC data, long sterling positions have been cut by 55% so with how deeply oversold the currency pair has become we would be surprised if there were no recovery. However the magnitude may be small given the shift in monetary policy expectations and economic backdrop of the currency.
On a technical basis, all of the oscillators show that GBP/USD is deeply oversold but with Friday’s decline, the currency pair also closed below the 100-day SMA for the first time since August 2013. This signals the possibility of further losses with the next level of support at 1.6630, the 23.6% Fibonacci retracement of the July 2013 to July 2014 rally. A move back above 1.70 would be needed to negate the downtrend in GBP/USD.