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How to Trade the British Pound if You Think It's Been Oversold

How to Trade the British Pound if You Think It's Been Oversold

2017-07-04 16:12:00
Martin Essex, MSTA, Analyst
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Talking Points

- GBP/USD has still failed to break through resistance in the 1.3000-1.3030 region.

- However, IG Client Sentiment data suggest that GBP/JPY could strengthen and that the current EUR/GBP uptrend may soon reverse lower.

- Check out the DailyFX Economic Calendar and see what live coverage of key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

Traders who think that the British Pound has been oversold because of worries about Brexit and concerns about the UK economic outlook would be better off buying GBP/JPY or selling EUR/GBP than buying GBP/USD, according to the latest IG Client Sentiment data.

The purchasing managers’ indexes released this week for the UK manufacturing and construction sectors were weak, and therefore negative for the Pound. However, the Bank of England’s rate-setting monetary policy committee appears to be inching its way towards tightening UK interest rates so the negative sentiment towards the currency may been overdone.

If you think that’s the case, it might be better not to buy GBP/USD, which continues to struggle to break through the strong resistance in the 1.3000-1.3030 area. Despite having tried several times recently to stay above that level, it has failed.

Chart: GBP/USD Daily Timeframe (April 2017 – July 4, 2017)

How to Trade the British Pound if You Think It's Been Oversold

Chart by IG

Instead, the IG Client Sentiment data suggest that buying GBP/JPY or selling EUR/GBP are both better options. In GBP/JPY, traders are currently further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bullish contrarian trading bias.

How to Trade the British Pound if You Think It's Been Oversold

In EUR/GBP, traders are currently less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse lower despite the fact traders remain net-short.

How to Trade the British Pound if You Think It's Been Oversold

Overall, therefore, trading GBP/JPY or EUR/GBP may both be better options than trading GBP/USD if you reckon that the British Pound is due for a rally.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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

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