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Brexit Latest: British Pound Forecast Weakens as Hard Brexit Odds Rise

Brexit Latest: British Pound Forecast Weakens as Hard Brexit Odds Rise

2019-06-14 20:30:00
Christopher Vecchio, CFA, Senior Strategist
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Brexit Latest Talking Points:

  • The first round of the UK’s Tory party leadership contest saw Boris Johnson (114 votes) easily blow past other contenders, with the second (Jeremy Hunt – 43 votes) and third (Michael Gove – 37 votes) place finishers falling well-behind.
  • The likely ascendance of Boris Johnson as the next Tory party leader has rekindled fears of a no deal, hard Brexit come October.
  • Changes in retail trader positioning suggest that more losses may be on the way for the British Pound, no matter where you look.

Looking for longer-term forecasts on the British Pound? Check out the DailyFX Trading Guides.

The British Pound is ending the first half of June on weak footing. Selling pressures began in earnest on Thursday after former London mayor, prominent Brexiteer, and hopeful resident of 10 Downing Street Boris Johnson cruised to an easy victory in the first round of the Tory leadership elections. Cleaning up 40% of the vote, Johnson easily beat the second (Jeremy Hunt – 43 votes) and third (Michael Gove – 37 votes) place finishers.

Why is the British Pound Falling?

The likely ascendance of Boris Johnson as the next Tory party leader, and therefore, the next likely opponent to Labour party leader Jeremy Corbyn in a UK general election, has rekindled fears of a no deal, hard Brexit come October. It should be noted that the top five vote getters in the Tory party leadership balloting were all for a no deal, hard Brexit if necessary, and historically for decades, Labour’s Corbyn has been anti-EU (which is part of the reason why we've held the belief that if Corbyn becomes UK prime minister, the British Pound may not recover).

Hard Brexit Odds Rising

While Johnson is willing to renegotiate the EU-UK Withdrawal Agreement (something that former UK PM Theresa May was unwilling to do), he does not want to see Article 50 extended any further and therefore is prepared to leave the EU at the end of October 2019 with or without a deal. Traders are looking ahead and seeing a future where, regardless of what results the Tory party leadership elections yield, the next UK prime minister is going to be pro-Brexit and therefore unwilling to take the steps necessary to avoid a no deal, hard Brexit come October.

Brexit Timeline - What's Next?

Over the next few days, there are several events traders should keep an eye on as the Brexit saga begins to heat up again, including over the weekend, according to my colleague Justin McQueen’s review of what’s next for Brexit:

  • June 16: Channel 4 will host the first live televised debate among the Tory candidates; frontrunner Boris Johnson is not expected to attend this debate.
  • June 18: A second Tory party leadership vote will take place where the minimum vote threshold for advancing to another round of voting increases from 17 to 32. The candidates will also be invited to a live debate on the BBC; frontrunner Boris Johnson is expected to attend this debate.
  • June 19-20: Up to four more rounds of voting will be held over the two-day period until just two candidates remain on the ballot.
  • June 22: The 160,000 Tory party members will start voting to determine who will become next leader and go on to face a no confidence vote in UK parliament, and if necessary, a UK general election.
  • July 22: The date at which the next Tory party leader PM is expected to be announced. If so, Theresa May will officially resign and Buckingham Palace will on the new Tory party leader to form a government. If the new Tory party leader fails to do so and fails a no confidence vote in UK parliament, then a general election will be held.

With the latest Brexit news rekindling the fears of a no deal, hard Brexit, the British Pound has been dragged lower in recent days: GBPJPY is set for its lowest close since the January Yen flash crash; GBPUSD is due for its lowest close of 2019; and EURGBP is set for its highest close since mid-January. Traders should be warned that the recent trend of British Pound weakness may continue into next week, at least according to recent shifts in positioning.

IG Client Sentiment Index: GBPUSD Price Forecast (June 14, 2019) (Chart 1)

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GBPUSD: Retail trader data shows 81.2% of traders are net-long 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 1.30551; price has moved 3.6% lower since then. The percentage of traders net-long is now its highest since Jun 05 when GBPUSD traded near 1.26892. The number of traders net-long is 3.4% higher than yesterday and 7.9% higher from last week, while the number of traders net-short is 18.0% lower than yesterday and 17.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bearish contrarian trading bias.

IG Client Sentiment Index: GBPJPY Price Forecast (June 14, 2019) (Chart 2)

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GBPJPY: Retail trader data shows 79.8% of traders are net-long with the ratio of traders long to short at 3.94 to 1. In fact, traders have remained net-long since May 6 when GBPJPY traded near 145.425; price has moved 6.0% lower since then. The number of traders net-long is 2.6% lower than yesterday and 2.6% lower from last week, while the number of traders net-short is 17.1% lower than yesterday and 27.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPJPY-bearish contrarian trading bias.

IG Client Sentiment Index: EURGBP Price Forecast (June 14, 2019) (Chart 3)

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EURGBP: Retail trader data shows 19.6% of traders are net-long with the ratio of traders short to long at 4.09 to 1. In fact, traders have remained net-short since May 9 when EURGBP traded near 0.85006; price has moved 4.8% higher since then. The number of traders net-long is 14.9% lower than yesterday and 19.4% higher from last week, while the number of traders net-short is 1.4% higher than yesterday and 5.5% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURGBP prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURGBP-bullish contrarian trading bias.

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Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

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