GBP/USD, GBP/JPY Surge on Latest Brexit News - Technical Levels for GBP-crosses
Brexit Latest Developments:
- A joint statement from UK Prime Minister Boris Johnson and Irish Taoiseach Leo Varadker said that the leaders have identified a potential “path forward” on the Irish border issue.
- The prospect of overcoming the Irish border issue would make it much easier for the UK to avoid a no-deal, hard Brexit.
- Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse higher despite the fact traders remain net-long.
With the October 31 Brexit deadline quickly approaching, policymakers in the EU and UK are scrambling to avoid a no-deal, hard Brexit. Hope springs eternal however: a joint statement from UK Prime Minister Boris Johnson and Irish Taoiseach Leo Varadker said that the leaders have identified a potential “path forward” on the Irish border issue.
Last week it was noted that, while concerns persist that a hard border between Northern Ireland and Ireland could upend the regional stability since the 1998 Good Friday Agreement, it is possible that the UK accepts an Irish-only backstop. The EU’s proposal would see Northern Ireland remain in the customs union with the EU, while England, Scotland and Wales – would Brexit.
British Pound Surges on Varadker-Johnson Meeting
The prospect of overcoming the Irish border issue would make it much easier for the UK to avoid a no-deal, hard Brexit. Accordingly, several GBP-crosses are surging on the day, with both GBP/JPY and GBP/USD gaining over 1.4% at the time this report was written. Meanwhile, GBP/CHF had added more than 1% while EUR/GBP was down nearly -1%.
UPCOMING KEY BREXIT DATES
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. And now that Irish Taoiseach and UK PM Johnson have identified a “path forward,” it appears that the EU-UK summit next week may very well yield a clearer path forward for Brexit.
GBPUSD RATE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2016 TO October 2019) (CHART 1)
Despite the fact that fresh weekly, monthly, and quarterly lows were established by GBP/USD this week, it now appears there is potential for a reversal higher. The weekly candle is now forming a bullish outside engulfing bar, suggesting that a near-term low may be in the process of forming. The sharp reversal in GBP/USD now sees weekly MACD trending higher (albeit in bearish territory), while Slow Stochastics are advancing above the median line.
GBPUSD Rate Technical Analysis: Daily Chart (October 2018 to October 2019) (Chart 2)
The sharp reversal higher by GBP/USD now sees price above the daily 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD has avoided a full turn through its signal line into bearish territory, while Slow Stochastics are rising out of oversold territory. The move to a fresh weekly, monthly, and quarterly highs suggests that much overhead supply has been eliminated. In turn, it may be a clearer path for GBP/USD to rally to the descending trendline from the March, May, and September highs near 1.2500 over the coming sessions.
IG Client Sentiment Index: GBPUSD Rate Forecast (October 10, 2019) (Chart 3)
GBPUSD: Retail trader data shows 71.8% of traders are net-long with the ratio of traders long to short at 2.55 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near 1.3056; price has moved 5.1% lower since then. The number of traders net-long is 4.9% lower than yesterday and 1.9% lower from last week, while the number of traders net-short is 3.6% higher than yesterday and 0.2% 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. 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.
GBPJPY Technical Analysis: Weekly Rate Chart (October 2016 to October 2019) (Chart 4)
Like GBPUSD, GBPJPY rates have turned higher and have established a bullish outside engulfing bar. With GBP/JPY trapped amid the weekly 8-, 13-, and 21-EMA envelope, daily MACD turning higher (albeit in bearish territory), and Slow Stochastics rising above their median line, it’s evident that there is no directional bias in the near-term – at least derived from longer-term timeframes.
GBPJPY Technical Analysis: Daily Rate Chart (October 2018 to October 2019) (Chart 5)
In our last GBPJPY technical forecast update, it was noted that “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.” Yet this did not occur: instead, support was found and GBPJPY never closed below 130.70.
GBPJPY is now trading above the daily 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order (for now). Slow Stochastics are rising out of oversold territory, while daily MACD has arrested its decline and is turning higher once again above its signal line. A move back towards the September high at 135.75 isn’t out of the question in the near-term.
IG Client Sentiment Index: GBPJPY Rate Forecast (October 8, 2019) (Chart 6)
GBPJPY: Retail trader data shows 64.5% of traders are net-long with the ratio of traders long to short at 1.81 to 1. In fact, traders have remained net-long since September 27 when GBPJPY traded near 132.88; price has moved 0.6% higher since then. The number of traders net-long is 7.5% lower than yesterday and 7.7% lower from last week, while the number of traders net-short is 11.9% lower than yesterday and 28.8% 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 “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.” Yet 0.8998 was never achieved on a closing basis, and now a bearish key reversal/outside engulfing bar is forming on the daily timeframe.
The rejection of the 23.6% retracement at 0.8997 now has EURGBP returning to the downtrend from the August and September highs. EURGBP rates are back below the daily 8-, 13-, and 21-EMA (which never returned to bullish sequential order). Daily MACD is turning lower in bearish territory, Slow Stochastics have exited overbought territory – a sign bullish momentum has been lost. A move back to the 61.8% retracement at 0.8796 should be eyed.
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 37.0% of traders are net-long with the ratio of traders short to long at 1.7 to 1. In fact, traders have remained net-short since May 9 when EURGBP traded near 0.8628; price has moved 3.1% higher since then. The number of traders net-long is 1.5% higher than yesterday and 12.3% lower from last week, while the number of traders net-short is 0.9% lower than yesterday and 6.6% 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. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURGBP 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
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