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British Pound Recovery Imperiled as Latest Brexit News Disappoints

British Pound Recovery Imperiled as Latest Brexit News Disappoints

2019-09-27 18:00:00
Christopher Vecchio, CFA, Senior Strategist
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Brexit Latest Talking Points:

  • The next steps in the Brexit process are uncertain. As it were, uncertainty over Brexit has been a negative for the British Pound, whose recent recovery throughout September is now imperiled.
  • If UK PM Johnson’s desire to get take the UK out of the EU on October 31 truly is an effort of ‘come hell or highwater,’ then it’s still possible that he circumvents UK parliament.
  • Retail trader positioning suggests that GBPJPY and GBPUSD rates may decline over the coming sessions.

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

After weeks of progress on the Brexit front, the entire process has been sidetracked once again. With the UK Supreme Court ruling against UK Prime Minister Boris Johnson’s prorogation of UK parliament, MPs are back in session with barely 34 days left until the October 31 Brexit deadline.

There is a last minute EU-UK summit scheduled for October 17 to 18 in order to try and hammer out the details for the October 31 Brexit deadline. Thanks to the passage of the Benn Act at the start of September, UK parliament now has a procedure in place to prevent UK PM Johnson from forcing through a no-deal, hard Brexit: if UK PM Johnson can’t find consensus with his EU counterparts, then he will be compelled to seek another Brexit deadline extension.

If UK PM Johnson’s desire to get take the UK out of the EU on October 31 truly is an effort of ‘come hell or highwater,’ then it’s still possible that he circumvents UK parliament. Some of speculated that an “order of council” could be used, a decree passed by ministers without the involvement of the Queen or UK parliament. Others have noted that UK PM Johnson could declare a national emergency under the 2004 “Civil Contingencies Act” in order to sidestep the Benn Act or call a general election.

Regardless, the next steps in the Brexit process are uncertain. As it were, uncertainty over Brexit has been a negative for the British Pound, whose recent recovery throughout September is now imperiled.

GBPUSD RATE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2016 TO September 2019) (CHART 1)

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The doji candle last week after the bullish outside engulfing bar in the first week of September suggested that bullish momentum was fading. Now, a bearish piercing candle threatens to round out a bearish evening star candle cluster, a topping pattern. GBPUSD rates remain above the descending trendline from the May and June 2019 highs, but has fallen back below the weekly 8-, 13-, and 21-EMA envelope (which remains in bearish sequential order). Weekly MACD has started to turn lower in bearish territory, while Slow Stochastics have seen their advance into bullish territory slow. The longer-term technical perspective is souring.

GBPUSD Rate Technical Analysis: Daily Chart (September 2018 to September 2019) (Chart 2)

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In our last GBPUSD technical forecast update, it was noted that “GBPUSD rates have maintained their elevation through 1.2380/85 suggesting that a turn has indeed occurred; a low may be in place for GBPUSD barring a no-deal, hard Brexit.” Now that a no-deal, hard Brexit is coming back into focus, the bottoming effort may be cut short.

GBPUSD rates are back below the daily 8-, 13-, and 21-EMA envelope (which is still in bullish sequential order. Slow Stochastics are quickly moving through bearish territory towards oversold, and daily MACD has turned lower (albeit still in bullish territory). Now that the September uptrend has been broken, the path of least resistance for GBPUSD is to the downside.

IG Client Sentiment Index: GBPUSD Rate Forecast (September 27, 2019) (Chart 3)

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GBPUSD: Retail trader data shows 67.4% of traders are net-long with the ratio of traders long to short at 2.06 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near 1.3079 ; price has moved 5.9% lower since then. The number of traders net-long is 1.7% lower than yesterday and 8.8% higher from last week, while the number of traders net-short is 4.2% lower than yesterday and 9.2% 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: Weekly Rate Chart (October 2016 to September 2019) (Chart 4)

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Like GBPUSD, GBPJPY rates failed to find follow through to the topside after the bullish outside engulfing bar/key reversal on the weekly timeframe in the first week of September. The inverted weekly hammer has seen prices drop back into the weekly 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Weekly MACD is still pointed higher (albeit in bearish territory), while Slow Stochastics’ advance has been stemmed.

GBPJPY Technical Analysis: Daily Rate Chart (August 2018 to September 2019) (Chart 5)

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In our last GBPJPY technical forecast update, it was noted that “It still holds that the call for a short-term bottoming effort would be invalidated on a return below 130.70.” Yet there’s already evidence cropping up that the bottoming effort by GBPJPY rates is failing: a drop below the 76.4% retracement of the 2016 low to 2018 high range at 132.30 would likely trigger the next wave of selling down to 130.70, the bullish outside engulfing bar low on September 9. GBPJPY rates are holding at the daily 21-EMA; the daily 8-, 13-, and 21-EMA envelope remains in bullish sequential order. Daily MACD has turned lower in bullish territory, while Slow Stochastics have moved below the median line into bearish territory.

IG Client Sentiment Index: GBPJPY Rate Forecast (September 27, 2019) (Chart 6)

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GBPJPY: Retail trader data shows 55.4% of traders are net-long with the ratio of traders long to short at 1.24 to 1. The number of traders net-long is 0.3% lower than yesterday and 1.0% lower from last week, while the number of traders net-short is 13.2% lower than yesterday and 1.6% 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.

EURGBP Technical Analysis: Monthly Rate Chart (1994 to 2019) (Chart 7)

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EURGBP rates have been grinding sideways for nearly three years. The bullish breakout attempt higher through the descending trendlines from the 2008 and 2015 highs and 2008 and 2016 highs failed; the inverted hammer in August suggests more downside is due. On the monthly timeframe, momentum is starting to shift to the downside. Monthly MACD is nearing a sell signal (albeit in bullish territory), while Slow Stochastics have already turned lower (in bullish territory as well). Until the 0.8472 to 0.9307 range breaks – until there is a clear shape of Brexit – traders may find themselves less anxious simply by staying away from EURGBP.

EURGBP Technical Analysis: Daily Rate Chart (September 2018 to September 2019) (Chart 8)

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EURGBP rates have rebounded in recent days around the 61.8% retracement of the 2019 low/high range at 0.8797. In turn, the downtrend from the highs in July and August is coming under pressure. EURGBP rates are making their wave above the daily 8-, 13-, and 21-EMA (which is still in bearish sequential order). Daily MACD has turned higher in bearish territory, while Slow Stochastics are rapidly approaching bullish territory. A move through the daily 21-EMA would bring into focus the 38.2% retracement of the 2019 low/high range at 0.8998.

IG Client Sentiment Index: EURGBP Rate Forecast (September 27, 2019) (Chart 9)

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EURGBP: Retail trader data shows 45.5% of traders are net-long with the ratio of traders short to long at 1.2 to 1. In fact, traders have remained net-short since May 9 when EURGBP traded near 0.8664; price has moved 2.6% higher since then. The number of traders net-long is 3.7% lower than yesterday and 3.6% higher from last week, while the number of traders net-short is 7.1% higher than yesterday and 11.2% 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.

What Happens to the British Pound: No Deal, Hard Brexit

Under a no-deal, hard Brexit outcome, traders should expect further losses by the British Pound, with EURGBP likely to trade closer to parity (1.0000), GBPJPY could trade towards 120.00, while GBPUSD could fall towards 1.1000 during the first 12-months of a no-deal, hard Brexit (keeping in mind that the European Central Bank and Federal Reserve would likely cut interest rates to prevent Brexit shocks from impacting either the Eurozone or US economies too significantly, thereby capping potential gains by the Euro and the US Dollar versus the British Pound).

What Happens to the British Pound: No Deal, Hard Brexit + Scottish Exit

But this would not be the worst case scenario for the British Pound; in the event that Scotland holds a second independence referendum, it’s likely markets will be facing down the threat of disintegration of Great Britain as we know it. Under a no-deal, hard Brexit coupled with a Scottish vote to leave the UK, traders should expect EURGBP to climb towards 1.0500, GBPJPY to fall towards 112.50, and GBPUSD to drop closer to 1.0500.

What Happens to the British Pound: General Election

There is scope for a short-term recovery for the British Pound if it appears that a no-deal, hard Brexit is delayed. This could come in the form of a general election that replaces Brexit hardliner Boris Johnson as UK prime minister. The vote on Tuesday, September 3 should be watched closely to see if the UK parliament is able to retake control of its schedule and avoid prorogation. In the event of a delay in the Brexit process, EURGBP could fall back towards 0.8600, GBPJPY could trade towards 133.00, while GBPUSD could rise towards 1.2600.

What Happens to the British Pound: Second Referendum

The only hope that the British Pound has for a significant recover is if Brexit is avoided altogether: after all, it will be impossible to replace the economic activity lost endured from leaving the EU, the world’s largest single market. In the event that the next UK prime minister has a change of heart and takes steps to avoid Brexit (e.g. a second referendum or withdrawing Article 50), EURGBP could fall back towards 0.8300, GBPJPY could rally back towards 145.00, and GBPUSD could climb back towards 1.4000; a full-scale recovery back to pre-June 2016 Brexit vote levels is highly unlikely in the immediate aftermath of the cancellation of Brexit.

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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