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Brexit Latest: GBP/JPY, GBP/USD Rates Pin Breakout Hopes on Brexit Deal

Brexit Latest: GBP/JPY, GBP/USD Rates Pin Breakout Hopes on Brexit Deal

Christopher Vecchio, CFA, Senior Strategist
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Brexit Deal Latest:

  • GBP-crosses have experienced a wave of volatility in recent days around confounding Brexit headlines, and hopes of a last minute deal have bulls keeping the faith.
  • Given how both GBP/JPY and GBP/USD rates have retained their bullish breakout potential, it would appear that rising risk appetite elsewhere – thereby sapping demand for safe havens like the Japanese Yen and US Dollar – is helping keep the pairs afloat.
  • Retail trader positioning suggests a mixed bias to the major GBP-crosses.

The End of Brexit Negotiations Nears…?

At the time of writing, UK Prime Minister Boris Johnson just finished having dinner with European Commission President Ursula von der Leyen, looking to salvage negotiations over what’s been a stalled Brexit deal. What had appeared to “simply be a matter of fisheries” (my own words) has become not so simple. The EU-UK leadership tandem agreed to keep negotiating until Sunday, December 13, at which point a “decision” will be made; color this strategist skeptical.

Markets appear skeptical of a breakthrough as well, given the initial kneejerk reaction for weakness in the GBP-crosses. But given how both GBP/JPY and GBP/USD rates have retained their bullish breakout potential, it would appear that rising risk appetite elsewhere – thereby sapping demand for safe havens like the Japanese Yen and US Dollar – is helping keep the pairs afloat.

And even as GBP-crosses have experienced a wave of volatility in recent days around confounding Brexit headlines, hopes of a last minute deal have bulls keeping the faith.

GBP/USD Rate Technical Analysis: Daily Chart (December 2019 to December 2020) (Chart 1)

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GBP/USD rates poked through to fresh yearly highs last week, but haven’t been able to make any meaningful progress with the fate of a Brexit deal on the line. Resistance remains overhead two-fold: are facing resistance two-fold in the very short-term. First, the monthly and yearly high, which comes in around 1.3539 this week. Second, and far more significantly, the descending trendline from the November 2007 and July 2014 highs – which intersects through 1.3360/80 the rest of the week. Recall that the November 2007 high is the all-time high. Breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.

Bullish momentum has waned as the prospect of a ‘no deal, hard Brexit’ has increased. GBP/USD rates are intertwined among their daily 5-, 8-, 13-, and 21-EMA envelope, which is still in bullish sequential order. Daily MACD is falling while above its signal line, while Slow Stochastics are quickly moving back towards their neutral line.

Swing traders or position traders on alert for a potential bullish breakout in GBP/USD rates may need to be patient for a bit longer.

IG Client Sentiment Index: GBP/USD Rate Forecast (December 9, 2020) (Chart 2)

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GBP/USD: Retail trader data shows 41.40% of traders are net-long with the ratio of traders short to long at 1.42 to 1. The number of traders net-long is 6.11% higher than yesterday and 0.92% lower from last week, while the number of traders net-short is 4.95% lower than yesterday and 3.40% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

GBP/JPY Technical Analysis: Daily Rate Chart (December 2019 to December 2020) (Chart 3)

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GBP/JPY rates traded sideways through the second half of November and now through the first week-plus of December, and the consolidation appears to be occurring within the context of a symmetrical triangle dating back to the March coronavirus pandemic low. Resistance has been found around 140.01, the 76.4% Fibonacci retracement of the 2020 high/low range. Similar to GBP/USD rates, traders should be on alert for bullish breakout potential in GBP/JPY rates.

IG Client Sentiment Index: GBP/JPY Rate Forecast (December 9, 2020) (Chart 4)

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GBP/JPY: Retail trader data shows 38.43% of traders are net-long with the ratio of traders short to long at 1.60 to 1. The number of traders net-long is 1.55% higher than yesterday and 24.03% lower from last week, while the number of traders net-short is 0.95% lower than yesterday and 13.77% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/JPY prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/JPY trading bias.

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

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