GBP/JPY, GBP/USD Drop, EUR/GBP Jumps as Latest Brexit News Disappoints
Brexit Latest News Overview:
- No-deal, hard Brexit planning has accelerated over the past 24-hours as a deal between the EU and the UK appears to be slipping away.
- The British Pound is the worst performing G10 currency on the day: GBPUSD is down by -0.61%, GBPJPY is off by -0.69%, and EURGBP has added 0.46% at the time of writing.
- Retail trader positioning suggests that the British Pound is likely to suffer more losses in the coming sessions.
Looking for longer-term forecasts on the British Pound? Check out the DailyFX Trading Guides.
No-deal, hard Brexit planning has accelerated over the past 24-hours as a deal between the EU and the UK appears to be slipping away. A tense phone call between German Chancellor Angela Merkel and UK Prime Minister Boris Johnson, described as a “frank exchanged,” revealed that the two sides remain far apart on a deal in the run up to the October 31 Brexit deadline.
Much contention remains over the border between Northern Ireland and the Republic of Ireland so as to ensure the regional stability in place the 1998 Good Friday Agreement.
While the UK government has said that it’s “not acceptable” for Northern Ireland to be kept inthe customs union post-Brexit, Johannes Wadephul, a deputyparliamentary group leader in German Chancellor Merkel’s Christian DemocraticUnion, said that UK PM Johnson“doesn’t want to recognize that the so-called backstop is unavoidable.”
In other words, less than a month away from the October 31 Brexit deadline, the EU and UK appear to be stuck between a rock and a hard place. As the Irish and Scottish government begin to announce fiscal response mechanisms, it seems that the prospect of a no-deal, hard Brexit hasn’t been higher. There’s little reason to think that volatility will die down among the GBP-crosses over the coming days.
Upcoming Key Brexit Dates
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.
GBPUSD RATE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2016 TO October 2019) (CHART 1)
GBPUSD rates continue to find follow through to the downside following the three-candle bearish evening star candle cluster established in early-September. GBPUSD rates remain below the descending trendline from the May and June 2019 highs, and continue to hold below the weekly 8-, 13-, and 21-EMA envelope (which remains in bearish sequential order). Weekly MACD is grinding into a turn lower in bearish territory, while Slow Stochastics are trending lower and have nearly entered bearish territory.
As of October 8, fresh weekly, monthly, and quarterly lows have been established. The longer-term technical picture remains bearish for GBPUSD.
GBPUSD Rate Technical Analysis: Daily Chart (October 2018 to October 2019) (Chart 2)
GBPUSD rates continue to trade below the daily 8-, 13-, and 21-EMA envelope, which is now fully in bearish sequential order. Daily MACD has turned lower through its signal line into bearish territory, while Slow Stochastics are back oversold territory. GBPUSD rates, having established a fresh weekly, monthly, and quarterly low today, have broken the October 1 doji candle low at 1.2204. The path of least resistance for GBPUSD appears to be to the downside.
IG Client Sentiment Index: GBPUSD Rate Forecast (October 8, 2019) (Chart 3)
GBPUSD: Retail trader data shows 73.5% of traders are net-long with the ratio of traders long to short at 2.77 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near 1.3056; price has moved 6.5% lower since then. The number of traders net-long is 8.4% higher than yesterday and 2.9% higher from last week, while the number of traders net-short is 3.4% higher 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 October 2019) (Chart 4)
Like GBPUSD, GBPJPY rates have seen follow through to the downside after the weekly inverted hammer in mid-September. Despite closing the gap open lower from the start of the week, GBPJPY rates have moved to fresh weekly, monthly, and quarterly lows like GBPUSD. GBPJPY continues to hold below the weekly 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Weekly MACD is starting to shift to the downside (in bearish territory), while Slow Stochastics’ have been trending lower (albeit in bullish territory).
GBPJPY Technical Analysis: Daily Rate Chart (October 2018 to October 2019) (Chart 5)
In our last GBPJPY technical forecast update, it was noted that “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.” Earlier today, GBPJPY rates dropped to 130.43.
GBPJPY rates are now fully below the daily 21-EMA; the daily 8-, 13-, and 21-EMA envelope remains in bullish sequential order. Daily MACD has turned lower below its signal line, while Slow Stochastics continue to hold in oversold territory. The momentum profile is fully bearish, and the path of least resistance remains to the downside.
A return back into the sideways consolidation that defined price action in August and early-September would constitute a false bullish breakout, ultimately calling for GBPJPY rates to return to their yearly low at 126.54.
IG Client Sentiment Index: GBPJPY Rate Forecast (October 8, 2019) (Chart 6)
GBPJPY: Retail trader data shows 66.2% of traders are net-long with the ratio of traders long to short at 1.96 to 1. In fact, traders have remained net-long since September 27 when GBPJPY traded near 132.88; price has moved 1.6% lower since then. The percentage of traders net-long is now its highest since Sep 10 when GBPJPY traded near 132.821. The number of traders net-long is 9.4% higher than yesterday and 4.3% lower from last week, while the number of traders net-short is 10.1% lower than yesterday and 10.4% 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. 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: Daily Rate Chart (October 2018 to October 2019) (Chart 7)
In the last EURGBP technical forecast update, it was noted that “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 August and September is coming under pressure…A move through the daily 21-EMA would bring into focus the 38.2% retracement of the 2019 low/high range at 0.8998.”
Coming into this week, EURGBP had been able to break the downtrend from the August and September highs, setting up the potential for a bullish reversal. Earlier today, EURGBP rates hit a high of 0.9000.
EURGBP rates are above the daily 8-, 13-, and 21-EMA (which is not yet fully aligned in bullish sequential order). Daily MACD continues to run higher in bearish territory, while Slow Stochastics have entered overbought territory – a strong sign for bullish momentum. A move above the 38.2% retracement of the 2019 low/high range at 0.8998 would eye a run higher to the 23.6% retracement at 0.9123.
EURGBP Technical Analysis: Monthly Rate Chart (1994 to 2019) (Chart 8)
EURGBP rates have been trading 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 saw follow through to the downside in September.
On the monthly timeframe, momentum continues to shift lower. Monthly MACD has issued 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.
IG Client Sentiment Index: EURGBP Rate Forecast (October 8, 2019) (Chart 9)
EURGBP: Retail trader data shows 32.5% of traders are net-long with the ratio of traders short to long at 2.08 to 1. In fact, traders have remained net-short since May 9 when EURGBP traded near 0.8628; price has moved 3.9% higher since then. The percentage of traders net-long is now its lowest since Sep 02 when EURGBP traded near 0.90878. The number of traders net-long is 15.8% lower than yesterday and 28.2% lower from last week, while the number of traders net-short is 16.2% higher than yesterday and 22.4% 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.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
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