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GBPUSD Rate Rebound Stalls as BoE Governor Strikes Cautious Tone

GBPUSD Rate Rebound Stalls as BoE Governor Strikes Cautious Tone

2019-08-27 06:30:00
David Song, Strategist
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British Pound Talking Points

The recent rebound in GBPUSD appears to be stalling as Bank of England (BoE) Governor Mark Carney strikes a cautious tone, but recent developments in the Relative Strength Index (RSI) foreshadow a larger correction in the exchange rate as the oscillator snaps the bearish trend from earlier this year.

GBPUSD Rate Rebound Fizzles as BoE Governor Strikes Cautious Tone

GBPUSD pulls back from the monthly-high (1.2294) as Governor Carney warns that the risk of no-deal Brexit “has risen sharply,” with the central bank head going into say that “the appropriate policy path would be more likely to ease than not.”

In turn, a growing number of BoE officials may change their tune with less than 70 days until the October 31 deadline, and the Monetary Policy Committee (MPC) may show a greater willingness to switch gears later this year as “the UK economy contracted slightly last quarter and surveys point to stagnation in this one.”

Image of BoE bank rate

However, Mr. Carney reiterates that “the monetary policy response to No Deal would not be automatic,” and it seems as though the BoE will retain a wait-and-see approach at the next meeting on September 19 as “the UK economy could follow multiple possible paths depending on how Brexit progresses.”

It remains to be seen if the MPC will draw up a contingency plan to a no-deal Brexit as “global momentum remains soft,” but retail sentiment remains skewed during the last full week of August even though GBPUSD continues to track the bearish trend from earlier this year.

Image of IG client sentiment for gbpusd

The IG Client Sentiment Report shows72.0%of traders are still net-long GBPUSD compared to 68.7% earlier this week, with the ratio of traders long to short at 2.57 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 6.8% lower since then.The number of traders net-long is 3.3% higher than yesterday and 6.5% lower from last week, while the number of traders net-short is 3.6% lower than yesterday and 5.5% higher from last week.

The drop in net-long position points to profit-taking behavior amid the recent rebound in GBPUSD, but the ongoing tilt in retail interest offers a contrarian view to crowd sentiment as the exchange rate continues to track the bearish trend from earlier this year.

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GBP/USD Rate Daily Chart

Image of gbpusd daily chart

Source: Trading View

  • 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).
  • However, recent developments in the Relative Strength Index (RSI) foreshadows a larger correction in GBPUSD as the oscillator bounces back from oversold territory and continues to track the bullish formation from earlier this month.
  • GBPUSD may show a similar dynamic as it comes up against trendline resistance, but the rebound from the yearly-low (1.2014) appears to be stalling ahead of the former support zone around 1.2370 (50% expansion) to 1.2440 (50% expansion) amid the lack of momentum to hold above the 1.2240 (61.8% expansion) region.
  • With that said, the 1.2100 (61.8% expansion) handle sits on the radar, with the next downside area of interest coming in around 1.1890 (61.8% expansion) to 1.1950 (78.6% expansion).

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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