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GBP/USD Remains Oversold; Outlook Clouded by ‘Hard Brexit’ Jitters

GBP/USD Remains Oversold; Outlook Clouded by ‘Hard Brexit’ Jitters

2016-10-12 15:00:00
David Song, Strategist
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Talking Points:

- GBP/USD Outlook Clouded by ‘Hard Brexit’ Jitters; RSI Sits in Oversold Territory.

- USD/JPY Stuck in Narrowing Range Ahead of Chair Yellen, U.S. Retail Sales.

DailyFX

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2200

1.2325

1.2106

78

219

GBP/USD Daily

GBP/USD DailyFX

Chart - Created Using Trading View

  • GBP/USD struggles to break out of the previous day’s range even as U.K. Prime Minister Theresa May softens her stance for the ‘Brexit’ procedures and agrees to a Parliament debate, but the near-term outlook for the sterling remains tilted to the downside as the exchange rate continues to carve lower highs, all while the Relative Strength Index (RSI) preserves the bearish trend carried over from the previous month and sits in oversold territory.
  • Ongoing jitters of a ‘Hard Brexit’ may continue to produce headwinds for the sterling especially as European Union (EU) officials remain reluctant to start negotiations, and the Bank of England (BoE) may come under increased pressure to further embark on its easing cycle as the economic outlook remains clouded with high uncertainty; however, the next quarterly inflation report due out in November may highlight a greater risk in overshooting the 2% target for inflation as central bank Deputy Governor Jon Cunliffe warns that the updated projections will reflect the depreciation in the British Pound.
  • Need the RSI to climb out of oversold territory and break the bearish formation to favor a larger recovery; will continue to watch the downside targets, with a closing price below 1.2100 (61.8% expansion) opening up the 2016-low (1.1905), followed by the Fibonacci overlap around 1.1680 (161.8% expansion) to 1.1730 (78.6% expansion).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

103.95

103.99

103.28

45

71

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • USD/JPY remains stuck in a narrowing range, with the pair still capped by 104.20 (61.8% retracement) as New York Fed President William Dudley and Kansas City Fed President Esther George provide little guidance on the monetary policy outlook; will remain a constructive outlook for the days ahead as the pair preserves the upward trend carried over from the end of September.
  • In turn, the Federal Open Market Committee (FOMC) Minutes may spark a limited market reaction as we still have Fed Chair Janet Yellen scheduled to speak at the end of the week, while U.S. Advance Retail Sales are projected to rebound in September; may see USD/JPY continue to face range-bound price action ahead of the key event risks as market participants mull the diverging paths for monetary policy.
  • Topside break of the monthly opening range accompanied by a closing price above 104.20 (61.8% retracement) may spur a move back towards 105.40 (50% retracement), followed by 106.60 (38.2% retracement).
DailyFX SSI
  • The DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long USD/JPY since July 21, with the ratio hitting 2016 extreme of +6.03 in September, while traders remain net-long GBP/USD since September 13 even as the pair slips to fresh 2016 lows.
  • USD/JPY SSI currently sits at +1.41 as 59% of traders are long, while long positions are 14.3% higher from the previous week even as open interest remains 11.8% below the monthly average.
  • GBP/USD SSI currently sits at +2.58 as 72% of traders are long even as long positions are 35.7% lower from the previous week, while open interest stands 5.1% below the monthly average.
  • Will keep a close eye on market conditions are market participations appears to be on the lighter end throughout the second-full week of October.

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Read More:

USD/JPY Exhaustion Shifts Focus to Uptrend Support

COT-Extreme Changes in Gold and Crude Positioning

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USD/CAD Plunges as Russia Signals Readiness to Cap Oil Production

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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