Bullish USD sentiment wanes, GBP/USD bears have a rethink - COT Report

Market positioning from the COT report – 4 February 2025:

• Net-long exposure to the USD declined by -$3.1 billion last week, down to $31.2 billion
• Large speculators increased their gross-long exposure to all major currencies against the US dollar last week
• They flipped to net-long exposure to the Japanese yen for the first week in six
• GBP/USD longs increased by 10.1% (6.1k contracts) and shorts were reduced by -5.2% (4.2k contracts), which saw net-short exposure drop by -11.3k contracts
• Asset managers reached another record high of net-short exposure to Swiss-franc futures (CHF/USD)
• They also flipped back to net-short VIX exposure, following Trump’s 30-day delay on Canada’s tariffs
• Asset managers reduced net-long exposure to bitcoin futures down to a 15-week low

US dollar positioning (IMM data) – COT report:

Sentiment is slowly turning against US dollar bulls. Not only did we see a drop of over $3 billion of net-long exposure to the US dollar, but gross-longs increased on all FX majors against it. The US dollar index also rose 10.5% from the September low to January high, and its rally stopped shy of the 2022 high.

Still, it is hard to bet against the US dollar, but it could seem feasible that we’ve entered a period of consolidation. For us to expect any meaningful pullback on the dollar likely requires a dovish Fed, and that seems quite unlikely over the foreseeable future.

Traders should keep an eye on what Jerome Powell says at this week’s semi-annual testimony to the House of Financial Services Committee alongside CPI figures. As both have the potential to see the US bid, which leaves the question of whether we need to be on guard for a breakout above 110 and for another crack at the 2022 high around 114.

GBP/USD (British pound futures) positioning – COT report:

Large speculators and asset managers reduced their net-short exposure to GBP/USD futures by a combined 15k contracts. The -10.4k decrease by large specs was the most bullish week-over-week increase in 19 weeks, likely due to the Bank of England warning of an inflation spike when they delivered their 25bp cut last week. This means large specs are now only net-short GBP/USD futures by -11.3k contracts after switching from net-long exposure just three weeks ago.

Asset managers net-short exposure is more convincing at -65k contracts, although they trimmed their exposure by -4.5k contracts last week.

JPY/USD (Japanese yen futures) positioning – COT report:

The arrival of a hawkish BOJ board member and calls for rates to rise to 1% have rekindled hawkish-BOJ bets and supported the Japanese yen. The risk-off flows seen last week also played a factor. And that has seen both large speculators and asset managers flip to net-long exposure.

While we’ve seen these traders flip between long and short exposure several times in recent weeks, I suspect the renewed expectations of BOJ hikes could see net-long exposure increasing alongside speculative volumes. And should we see bullish sentiment on the USD continue to wane, that could pave the way for a lower USD/JPY.

Also note that we may have seen the completion of an ABC correction on yen futures, which also plays into the hands of a bearish USD/JPY.

Wall Street indices (S&P 500, Dow Jones, Nasdaq 100) positioning – COT report:

Asset managers seem confident betting against Nasdaq futures, as gross shorts have been trending higher since December. That said, the week-over-week change was effectively flat last week, but the trend is clearly rising given it sits around its highest level since April 2023.  

Meanwhile, asset managers seem to be erring on the side of bullish caution by continuing to trim gross longs, yet remain hesitant to increase shorts by any meaningful amount. The basic takeaway here could be that asset managers think tech is overvalued, but remain bullish on the stock market overall.

Gold futures (GC) positioning – COT report:

Gold’s bullish trend continues to deliver, with gold reaching its latest record high amid a 6-week winning streak. While total open interest has been declining in recent weeks, speculative volume (large speculator and managed funds combined) has been rising alongside prices.

Net-long exposure is approaching, but not necessarily at, a sentiment extreme among large speculators. It was also a touch lower among managed funds last week. While the rise of fresh longs among both sets of traders is outpacing shorts, it is worth noting that shorts are indeed rising to suggest some suspect an oversold market.

Regardless, this has been a rally that has continually defied bears. And with central banks continuing to purchase gold, a market which seems unphased by a stronger US dollar, trying to pick a top without a decent catalyst seems like a low probability setup. And gold could continue to favour patient bulls who sit on the side line.  

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