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Brexit Latest Talking Points:

  • The British Pound remains under pressure as UK PM Theresa May nears her resignation date on June 7.
  • It looks increasingly likely that another UK general election will be held as the likely next Tory party leader won’t be able to pass a confidence vote in UK parliament.
  • Retail trader FX positioning suggests that the British Pound may still see rocky trading ahead.

Looking for longer-term forecasts on the British Pound? Check out the DailyFX Trading Guides.

The start of June brings forth no good news for the British Pound. The May UK Manufacturing PMI showed the first contraction in the manufacturing sector since July 2016, with output at a 34-month low and new export business declining at its fastest rate in more than four-and-a-half years. The backdrop of a weakening UK economic environment is doing little favors for the British Pound, which is in focus over the coming days as UK Prime Minister Theresa May’s term nears its expiration date on June 7.

European Parliamentary Elections Bode Poorly for a UK General Election

The European parliamentary elections have been one major reason why sentiment has soured on the British Pound over recent weeks. With Nigel Farage’s Brexit party taking top spot among the UK delegates, and the Liberal Dems taking second place, there is clearly a lot of anti-establishment sentiment circulating in the UK right now. Such an environment bodes poorly for both the Labour and Tory parties if there is another general election; it’s possible that neither has a strong showing. In turn, it seems that the odds of a no deal, “hard Brexit” have increased in a material fashion.

Boris Johnson as Next Tory Party Leader?

The UK remains embroiled in domestic political turmoil as the lack of progress on Brexit has ended the tenure of UK Prime Minister Theresa May. While jostling for the next Tory party leader continues as former London mayor and Brexiteer Boris Johnson has emerged as a clear frontrunner, the rise of the Brexit party around the European parliamentary elections has raised concerns that, if there were to be a second referendum for either the (1) EU-UK Withdrawal Agreement, or (2) a no deal, “hard Brexit,” the UK electorate might opt for the latter.

Next Key Dates for Brexit

Now that we’ve gotten to June, there are several key deadlines coming up over the next few weeks. The following dates represent the next hurdles in the Brexit process:

  • June 7: UK PM May to resign; next Tory party leadership race officially begins.
  • June 15: National Conservative Convention to see Tory leaders contend for support.
  • June 15 to End of July: Tory party leadership race will eventually narrow to two candidates.
  • After New Tory Party Leader: Confidence vote for Tory party leader designated to be PM; if failure, then a new UK general election.

GBPJPY Technical Analysis: Daily Price Chart (December 2017 to June 2019) (Chart 1)

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Bearish momentum in GBP-crosses has been firm over the past several weeks, and this negativity hasn’t been more pronounced than in GBPJPY price action since the multi-month range break. With global equity markets turning over along global sovereign bond yields, the Japanese Yen has seen its appeal as a safe haven currency grow significantly since the start of May.

Since May 6, GBPJPY price has closed below its daily 8-, 13-, and 21-EMA envelope every session; price has only eclipsed the daily 8-EMA intraday once during this timeframe, on May 22. Now that GBPJPY has hit the 61.8% retracement of the October 2016 low/January 2018 high range, there may be a technical level of support to look to for a small bounce rebound to the daily 8-EMA.

As it stands, the GBPJPY price outlook remains bearish until the daily 8-EMA is breached on a closing basis. Otherwise, losses may continue back down towards the closing low of the year-to-date, which came in at 135.99 on January 3, and ultimately the 76.4% retracement of the October 2016 low/January 2018 high range at 132.30.

IG Client Sentiment Index: GBPJPY Price Forecast (June 3, 2019) (Chart 2)

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GBPJPY: Retail trader data shows 79.1% of traders are net-long with the ratio of traders long to short at 3.79 to 1. In fact, traders have remained net-long since May 06 when GBPJPY traded near 145.334; price has moved 5.7% lower since then. The number of traders net-long is 8.5% higher than yesterday and 4.0% higher from last week, while the number of traders net-short is 11.5% higher than yesterday and 4.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPJPY prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPJPY price trend may soon reverse higher despite the fact traders remain net-long.

GBPUSD Technical Analysis: Daily Price Chart (June 2018 to June 2019) (Chart 3)

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Since the bearish outside engulfing bar on June 14, 2018, GBPUSD has spent around 95% of the past year within the 1.2660 to 1.3365 range. But the range may be starting to break: six of the past eight sessions have seen GBPUSD price close below 1.2660.

Like its GBPJPY counterpart, GBPUSD price has been pinned below its daily 8-, 13-, and 21-EMA envelope for the better part of the last month, having closed below the daily 8-EMA on May 8. Ongoing bearish momentum points to more losses in the near-term after a brief rebound in price action back to the daily 8-EMA; only a close back above the daily 8-EMA would neutralize the otherwise near-term GBPUSD bearish bias.

But if GBPUSD prices are going to break lower from here, then the rising trendline from the August 2016, January 2017, and December 2018 lows will need to give way first – an event that failed to materialize on the last attempt back in December 2018. Should GBPUSD lose 1.2600 over the coming days, it would constitute a break of said trendline and would raise the odds of a deeper lose towards the December 2018 low at 1.2477.

IG Client Sentiment Index: GBPUSD Price Forecast (June 3, 2019) (Chart 4)

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GBPUSD: Retail trader data shows 80.1% of traders are net-long with the ratio of traders long to short at 4.03 to 1. In fact, traders have remained net-long since May 06 when GBPUSD traded near 1.30315; price has moved 2.9% lower since then. The number of traders net-long is 2.9% higher than yesterday and 1.0% higher from last week, while the number of traders net-short is 21.6% higher than yesterday and 7.8% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBPUSD trading bias.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides