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GBP/USD & GBP/JPY Turn Lower after UK PMIs, Latest Brexit News

GBP/USD & GBP/JPY Turn Lower after UK PMIs, Latest Brexit News

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Brexit Latest Talking Points:

  • There is a growing body of evidence that the UK economic backdrop has started to deteriorate and speculation is starting to build that, when the Bank of England is finally able to move on interest rates again, it will follow the growing horde of central banks leaning into more dovish policy.
  • The fact is that traders are looking ahead and seeing a future where, regardless of the next Tory party leader, the next UK prime minister is going to be pro-Brexit and fail to avoid a no deal, hard Brexit.
  • Retail trader positioning suggests that the British Pound may be under more pressure heading into mid-July.

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

A new month and a new quarter has not translated into a new reality for the British Pound. With Brexit continuing to serve as the albatross around the British Pound’s neck, the British Pound has failed to rally in an environment otherwise proving supportive for riskier assets. The most probable outcome of the Tory party leadership election and the implications for Brexit (and the broader economy) are the likely catalysts for the British Pound’s poor performance.

Now that there is a growing body of evidence that the UK economic backdrop has started to deteriorate – look no further than the June UK Markit/CIPS Services and Composite PMIs released earlier today – speculation is starting to build that, when the Bank of England is finally able to move on interest rates again, it will follow the growing horde of central banks leaning into more dovish policy.

Outgoing UK PM May to Stay Active from Backbench

The latest Brexit news suggests that the favorite for the next Tory party leader, Boris Johnson, will get no help from outgoing UK Prime Minister Theresa May. While outgoing UK PM May will return to the Tory backbench, reports today indicate that she will not publicly state that Boris Johnson’s no deal, hard Brexit plan won’t be detrimental to the UK economy. In fact, it sounds like outgoing PM May will be working to prevent a no deal, hard Brexit after she leaves office; dissent within the Tory party could spell trouble for a no confidence vote, ultimately paving the way for a UK general election.

Tory Leadership Election in Process

Markets are forward looking by nature, which means that traders are wasting no time pricing in the expected outcomes surrounding the Tory leadership election and a potential UK general election. Here’s where we stand in the Tory leadership election contest:

  • Since June 22: The 160,000 Tory party members have started 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 23: 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.

The fact is that traders are looking ahead and seeing a future where, regardless of either Boris Johnson or Jeremy Hunt ascending to the position of Tory party leader, 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.

As concerns of a no deal, hard Brexit threat grow as the Tory party leadership election presses forward, the British Pound has started to come under renewed pressure – despite global equity markets (a proxy for risk appetite) rallying sharply in recent weeks. To this end, if market sentiment deteriorates, the British Pound may be more vulnerable to downside more than other major currencies.

GBPUSD Technical Analysis: Daily Price Chart (July 3, 2019) (Chart 1)

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Considering how weak the US Dollar (via the DXY Index) has been over the past several weeks, the failure for GBP/USD to rally more significantly is a stark indictment of the British Pound’s overall weak fundamental footing. Now, the technical picture has started to erode in a manner suggesting that more weakness is due for GBP/USD.

GBP/USD price remains below the daily 8-, 13-, and 21-EMA envelope, and if the daily candle were to finish at these levels, it would represent the third lowest close of the year. Daily MACD has just turned lower in bearish territory, issuing a ‘sell signal’ in the process, and while Slow Stochastics have been trending lower over the past week-plus, they’ve just moved below the median line for the first time today. Overall, bearish momentum is starting to build for GBP/USD; a return to the June low at 1.2506 shouldn’t be ruled out.

IG Client Sentiment Index: GBPUSD Price Forecast (July 3, 2019) (Chart 2)

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GBPUSD: Retail trader data shows 76.6% of traders are net-long with the ratio of traders long to short at 3.27 to 1. In fact, traders have remained net-long since May 06 when GBPUSD traded near 1.29202; price has moved 2.6% lower since then. The percentage of traders net-long is now its highest since Jun 21 when GBPUSD traded near 1.27426. The number of traders net-long is 10.2% higher than yesterday and 14.4% higher from last week, while the number of traders net-short is 18.3% lower than yesterday and 13.9% 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.

GBPJPY Technical Analysis: Daily Price Chart (July 3, 2019) (Chart 3)

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The technical outlook for GBP/JPY is similar to that of GBP/USD: having failed to take advantage of an environment where risk appetite was bolstered and global equities were rallying (thereby undercutting the Japanese Yen), GBP/JPY prices are now exposed to deeper losses in the event of a broad erosion in market sentiment.

Like GBP/USD, GBP/JPY prices are sustaining a move below the daily 8-, 13-, and 21-EMA envelope, and Slow Stochastics has turned lower below its median line. However, daily MACD has yet to issue a ‘sell signal,’ even as it remains in bearish territory. Regardless, with GBP/JPY dropping below the 2019 low close at 135.99, it now stands to reason that the path of least resistance is to the downside – and that bearish momentum is about to accelerate through mid-July.

IG Client Sentiment Index: GBPJPY Price Forecast (July 3, 2019) (Chart 4)

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GBPJPY: Retail trader data shows 77.7% of traders are net-long with the ratio of traders long to short at 3.49 to 1. In fact, traders have remained net-long since May 06 when GBPJPY traded near 144.239; price has moved 6.0% lower since then. The number of traders net-long is 7.3% higher than yesterday and 1.0% higher from last week, while the number of traders net-short is 12.6% higher than yesterday and 2.1% 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPJPY price trend may soon reverse higher despite the fact traders remain net-long.

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

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

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