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British Pound (GBP) Outlook Strained as Article 16 Fears Flare Up

British Pound (GBP) Outlook Strained as Article 16 Fears Flare Up

Nick Cawley, Senior Strategist


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EUR/GBP Price, Chart, and Analysis

  • EU/UK relations continue to sour.
  • Sterling supported for now but article 16 fears remain.
  • Retail traders shun EUR/GBP.
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According to a raft of media outlets, the EU may suspend the Brexit trade deal if the UK triggers article 16, as has been suggested, as the relationship between the two sides continues to deteriorate. Article 16 allows goods to flow between the Republic of Ireland and Northern Ireland without checks, although goods from the UK going into Northern Ireland are subject to checks. While both the EU and the UK say that they have made concerted efforts to break the current stalemate, neither side is currently willing to budge from their stated positions, leaving a formal triggering of article 16 a very live possibility.

Any triggering of article 16 by the UK and retaliatory action by the EU would leave Sterling vulnerable to further downside. The British Pound has fallen across the board in the last few days after the Bank of England disappointed the markets last week by leaving interest rates unchanged. Going into the BoE meeting, markets had been pricing a 50/50 chance of the UK base rate being increased by 15bps to 0.25%. The subsequent scaling back of rate hike expectations has seen Sterling slide to multi-week lows against a range of currencies.

Retail trade data – see below – shows that traders have not only scaled back their net-long positions over the week but have also sharply increased their net-short positions in EUR/GBP over the same timeframe. After touching a near two-year low on October 26 at 0.8403, EUR/GBP rallied back to just 0.8600 before settling around 0.8575 today. Any further expectations that article 16 will be triggered by the UK may see the pair re-test the end-of-September high at 0.8659 before moving towards 0.8712.

EUR/GBP Daily Price Chart November 8, 2021

Retail trader data show 50.54% of traders are net-long with the ratio of traders long to short at 1.02 to 1. The number of traders net-long is 1.93% higher than yesterday and 46.86% lower from last week, while the number of traders net-short is 7.81% higher than yesterday and 84.82% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on EUR/GBP– bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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