Open interest in the British Pound increased dramatically last week moving strongly from 95,700 contracts of 2 weeks ago to 119k of 16th February, and as clearly evidenced on the weekly COT chart continues to increase from the low of mid December at 72k. With open interest volume now increasing and a consequent fall in the pound against the dollar this suggests strongly bearish sentiment in the market. In simple terms the rise in open interest indicates new trading positions being created, with the fresh money probably creating additional short positions which are adding further to the bearish pressure. The current open interest picture confirms the current technical perspective both on the daily and weekly charts in the spot market. It is also interesting to note that in mid 2008 we saw an exponential increase in open interest (in excess of 180k contracts) while prices were range bound at the USD1.95 to USD2.0 price region. This type of activity in the futures market is often an excellent signal of an imminent and significant move, and whilst the market direction cannot always be forecast with any degree of certainty, it can provide us with an excellent early warning sign that the market is about to break out.
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