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British Pound Talking Points

GBPUSD appears to be on track to test the 2019-low (1.2373) as the Bank of England (BoE) changes its tune, and the exchange rate may exhibit a more bearish behavior over the coming days as the Relative Strength Index (RSI) flirts with oversold territory.

GBPUSD RSI Flirts with Oversold Zone, Retail Sentiment Gets Stretched

GBPUSD extends the decline from the start of the month as BoE Governor Mark Carney insists that the central bank “will respond to any material change in the outlook, adjusting policy in either direction, as required to bring inflation sustainably back to the 2% target.”

Image of boe official bank rate

The comments suggest the Monetary Policy Committee (MPC) will abandon the rate hiking cycle as “growth in the second quarter will be considerably weaker,” and it seems as though the central bank will continue to change its tune over the coming months as “recent data also raise the possibility that the negative spillovers to the UK from a weaker world economy are increasing.”

In turn, the BoE may alter the forward guidance at the next meeting on August 1 as the central bank updates its quarterly inflation report (QIR), and the updates to the monthly UK Gross Domestic Product (GDP) report may do little to influence the monetary policy outlook as the update is anticipated to show the economy expanding 0.3% in May after contracting 0.4% the month prior.

With that said, the British Pound stands at risk of facing a more bearish fate over the remainder of the year as “a global trade war and a No Deal Brexit remain growing possibilities,” but retail sentiment remains skewed despite the recent pickup in GBPUSD volatility.

Image of IG client sentiment for gbpusd

The IG Client Sentiment Report shows 83.2% of traders are net-long GBPUSD, with the ratio of traders long to short at 4.94 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near the 1.3100 handle even though price has moved 4.9 lower since then.

The number of traders net-long is 7.8% higher than yesterday and 24.3% higher from last week, while the number of traders net-short is 2.1% higher than yesterday and 19.5% lower from last week. Profit-taking behavior may explain the decline in net-short interest as GBPUSD trades to a fresh monthly-low (1.2439), but the extreme reading in net-long position indicates the retail crowd is attempting to fade the recent decline in the exchange rate as the gauge pushes to fresh 2019 highs.

The tilt in retail interest offers a contrarian view to crowd sentiment especially as GBP/USD snaps the bullish trend from late-2018, while the Relative Strength Index (RSI) continues to track the bearish formation from earlier this year.

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GBP/USD Rate Daily Chart

Image of gbpusd daily chart
  • Keep in mind, the broader outlook for GBP/USD is no longer constructive as the exchange rate snaps the upward trend from late last year after failing to close above the Fibonacci overlap around 1.3310 (100% expansion) to 1.3370 (78.6% expansion).
  • The Relative Strength Index (RSI) highlights a similar dynamic, with recent developments in the oscillator offering a bearish signal as it snaps the upward trend from May and appears to be on the cusp of pushing into oversold territory.
  • In turn, a break/close below 1.2440 (50% expansion) raises the risk for a move towards the 1.2370 (50% expansion) region, which lines up with the 2019-low (1.2373), with the next area of interest coming in around 1.2240 (61.8% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for GBP

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.