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GBPUSD Retail Position Remains Stretched, RSI Dips into Oversold Zone

GBPUSD Retail Position Remains Stretched, RSI Dips into Oversold Zone

David Song, Strategist

British Pound Talking Points

GBPUSD tumbles to a fresh yearly low (1.2156) ahead of the Bank of England (BoE) meeting on August 1, and current market conditions may produce a further decline in the exchange rate as retail position remains stretched, while the Relative Strength Index (RSI) pushes into oversold territory.

GBPUSD Retail Position Remains Stretched, RSI Dips Into Oversold Zone

The British Pound extends the decline from earlier this week as Prime Minister Boris Johnson pushes for new Brexit deal, with spokeswoman Alison Donnelly insisting that “the prime minister will be happy to sit down with leaders when that position changes.”

The comments suggest the new prime minister is in no rush to meet with European Union (EU) leaders even though there’s less than 100 days left till the October 31 deadline, and headlines surrounding Brexit may continue to shake up the near-term outlook for the British Pound especially as Nicola Sturgeon, the First Minister of Scotland, warns that Mr. Johnson “is really pursuing a no-deal Brexit because that is the logic of the hardline position that he has taken.

The growing threat of a no-deal Brexit may push the BoE to alter the forward guidance as “the economic outlook will continue to depend significantly on the nature and timing of EU withdrawal,” and the updates to the quarterly inflation report (QIR) may highlight a different path for monetary policy as the current assessment is based on the “assumption of a smooth Brexit.”

In turn, the Monetary Policy Committee (MPC) may adopt a dovish tone as “underlying growth in the United Kingdom appears to have weakened slightly in the first half of the year relative to 2018,” and Governor Mark Carney and Co. may prepare UK households and businesses for lower interest rates as the central bank warns “downside risks to growth have increased.

A downward revision in the BoE’s economic projections along with a material shift in the MPC’s forward guidance is likely to produce headwinds for the British Pound, but retail positions remains skewed even though GBPUSD trades to fresh yearly lows.

Image of IG client sentiment

The IG Client Sentiment Report shows81.2%of traders are still net-long GBPUSD compared to 78.0% last week, with the ratio of traders long to short at 4.31 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 7.2% lower since then.The number of traders net-long is 1.5% higher than yesterday and 14.1% higher from last week, while the number of traders net-short is 1.7% lower than yesterday and 31.5% lower from last week.

The drop in net-short position points to profit-taking behavior as GBP/USD trades to fresh 2019 lows, but the ongoing tilt in net-long position offers a contrarian view to crowd sentiment as the exchange rate tracks a bearish trend, with the Relative Strength Index (RSI) highlighting a similar dynamic.

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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 recent series of lower highs and lows keeps the downside targets on the radar for GBPUSD, with the break/close belo w 1.2240 (61.8% expansion) bring the 1.1890 (61.8% expansion) 1.1950 (78.6% expansion) region.
  • At the same time, recent developments in the Relative Strength Index (RSI) suggests the bearish momentum is gathering pace as the oscillator breaks below 30 and pushes into oversold territory.

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

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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