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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 hasn’t been able to take advantage of the weak US Dollar environment after the June Fed meeting, and Brexit is to blame. With the Bank of England’s June meeting producing little meaningful change because of the ongoing Brexit negotiations, the key driver for the Sterling has been none other than the Tory leadership election contest – which in turn, will likely determine the fate of Brexit.

Latest Tory Party Leadership Election Results

After easily winning the first four rounds of votes, Boris Johnson emerged on Thursday with 160 votes as the favorite the next Tory party leader, easily beating out second place finisher and former Remainer Jeremy Hunt, who had 77 votes. Michael Gove was knocked out after only receiving 75 votes.

As it were, Boris Johnson is a steadfast Brexiteer. 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.

Tory Leadership Election Contest Next Steps

Traders are looking ahead and seeing a future where, regardless of what results the Tory party leadership elections yield, the next UK prime minister (Hunt, Boris Johnson, or Labour party leader Jeremy Corbyn) is going to be pro-Brexit and therefore unwilling to take the steps necessary to avoid a no deal, hard Brexit come October.

Over the next few weeks, the Brexit saga will cool off, as focus will turn to canvassing across the UK, according to my colleague Justin McQueen’s review of what’s next for Brexit:

  • 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 keeping fears of a no deal, hard Brexit at the forefront, the British Pound has not been able to take advantage of a more risk seeking environment. It stands to reason that if market sentiment reverses lower, the British Pound may be a leader to the downside after failing to rally more significantly.

IG Client Sentiment Index: GBPUSD Price Forecast (June 20, 2019) (Chart 1)

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GBPUSD: Retail trader data shows 75.5% of traders are net-long with the ratio of traders long to short at 3.08 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near 1.3032; price has moved 2.5% lower since then. The number of traders net-long is 16.7% lower than yesterday and 11.0% lower from last week, while the number of traders net-short is 9.4% higher than yesterday and 1.3% 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse higher despite the fact traders remain net-long.

IG Client Sentiment Index: GBPJPY Price Forecast (June 20, 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 3.95 to 1. In fact, traders have remained net-long since May 6 when GBPJPY traded near 145.281; price has moved 6.1% lower since then. The number of traders net-long is 1.3% lower than yesterday and 4.9% lower from last week, while the number of traders net-short is 4.0% higher than yesterday and 19.2% lower 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. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBPJPY trading bias.

IG Client Sentiment Index: EURGBP Price Forecast (June 20, 2019) (Chart 3)

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EURGBP: Retail trader data shows 19.1% of traders are net-long with the ratio of traders short to long at 4.24 to 1. In fact, traders have remained net-short since May 9 when EURGBP traded near 0.85002; price has moved 4.6% higher since then. The number of traders net-long is 5.1% lower than yesterday and 16.4% lower from last week, while the number of traders net-short is 3.2% higher than yesterday and 3.2% 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.

FX TRADING RESOURCES

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