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Traders turned to the short GBP trade for profits in Q3

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FX traders were piling into the obvious merits of the short GBP trade over the last few months. According to the Q3 2022 Pulse report published by global trading and investing platform Capital.com, the currency markets saw some of the highest levels of trading activity among its retail traders in the third quarter, with trading volumes in the GBP/USD reporting some of the biggest spikes following the UK government’s mini-budget announcement.

According to the findings of the Pulse report, trading volumes in GBP/USD across the broker’s platform amounted to more than $11bn in Q3, 144% higher than Q2. The number of people trading GBP/USD also increased by 23% in Q3 vs Q2, with UK and Middle East traders accounting for the largest volume of trades in the popular currency pair.

Daniela Hathorn, Market Analyst at Capital.com, said the significant pick-up in trading volumes in GBP/USD was likely driven by increased volatility and a stronger USD.

“In August alone, the pound fell by more than 7% against the US dollar. Meanwhile, record-high natural gas prices, central bank divergence and further political uncertainty added to the pound’s volatility. All of these events conspired against the pound, leading traders and investors to massively trade and subsequently short the currency against a rising US dollar.”

Based on the data released in the Pulse report, the pound was one of the most-shorted instruments on the Capital.com platform between July and September. The share of short-position trades in the British pound increased from 38% in Q4 2021 to 46% in Q3 with a significant rise in bearish sentiment immediately following the appointment of the new UK government.


Traders shorted pound when Truss won vote

Big spikes in the number of traders going short GBP occurred on 6 September—the day Liz Truss was named the new Prime Minister. Short positions in GBP/USD were up to 44% on 6 September, compared with 37% on the previous day.

The findings also show that trading volumes in GBP/USD reached record highs following the UK’s ‘mini-budget’ announcement with a further 549% increase since 6 September.

“The initial reaction to the UK mini-budget was brutal, with GBP/USD seeing the biggest daily drop since the Brexit referendum back in 2016 and pushing the UK currency into the top spot as the worst performing G10 currency so far this year. While the government’s recent U-turn and central bank intervention has helped turn the tide for the British pound, Capital.com believes risk premiums on UK assets are likely to remain elevated a little longer.

“Low consumer confidence and the belief that the Bank of England joined the hiking party a little too late will continue to add further downside pressure on the British Pound,” added Hathorn.

The findings were revealed in Capital.com’s quarterly report—Pulse— which tracks the trading patterns of retail investors across all markets it operates in. Over 6 million people have opened an account on the Capital.com platform.

Even as stock markets rebounded during July and August, short selling remained as popular a trade in the third quarter as during the second – suggesting traders put little faith in the bounce, Capital.com said.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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