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GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

2019-10-17 02:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Brexit Latest News:

  • Signs that the EU-UK summit will yield substantive progress towards a Brexit deal have market participants bidding up the British Pound.
  • The British Pound is the best performing G10 currency thus far in October. Month-to-date, GBP/JPY has gained 4.93%, GBP/USD has gained 4.39%, and EUR/GBP has lost 2.79%.
  • Retail trader positioning suggests that the British Pound is likely to rally further in the days ahead.

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

A Brexit deal announcement may be around the corner. With UK Prime Minister Boris Johnson’s government announcing that it intends to honor the Benn Act and ask the EU for a negotiating deadline extension, hope has sprung eternal that a Brexit deal is within reach. The simple signal of being willing to accept another Brexit extension suggests that a no-deal, hard Brexit is very unlikely to occur.

The prospect of a deal that would allow the UK to leave the EU without crashing out has been an extremely bullish catalyst for the British Pound, which is in the midst of its best one-week run in its history. With the EU-UK summit scheduled to take place over the next two days, it seems likely that the news wires will run out with market-moving information; traders should be anticipating a high degree of volatility in GBP-crosses, regardless of which way the Brexit news turns out.

GBP/USD RATE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2016 TO October 2019) (CHART 1)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

In our last GBP/USD technical forecast update, it was noted that “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.” There has been meaningful follow through since last week, and now GBP/USD has returned above the ascending trendline from the October 2016 and December 2018 lows, as well as breaking above the descending trendline from the April 2018 and March 2019 highs.

GBP/USD Rate Technical Analysis: Daily Chart (October 2018 to October 2019) (Chart 2)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

GBP/USD’s sharp bullish move in recent days has seen the rally extend well-above its daily 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD is trending higher in bullish territory – its highest level since January – while Slow Stochastics have risen into overbought territory. Now that the descending trendline from the April 2018 and March 2019 highs has been broken, GBP/USD rates may continue to extend to the topside to the 38.2% retracement of the “Brexit trading range” – the June 2016 high to the October 2016 low – at 1.3094.

IG Client Sentiment Index: GBP/USD Rate Forecast (October 16, 2019) (Chart 3)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

GBP/USD: Retail trader data shows 54.8% of traders are net-long with the ratio of traders long to short at 1.21 to 1. In fact, traders have remained net-long since May 6 when GBP/USD traded near 1.3088; price has moved 1.8% lower since then. The number of traders net-long is 5.5% lower than yesterday and 30.4% lower from last week, while the number of traders net-short is 2.0% higher than yesterday and 59.7% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD 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 GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.

GBP/JPY Technical Analysis: Weekly Rate Chart (October 2016 to October 2019) (Chart 4)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

Like GBP/USD, GBP/JPY rates established a bullish outside engulfing bar last week and have seen considerable follow through to the topside. GBP/JPY rates are now above their EMA envelope, although weekly 8-, 13-, and 21-EMAs are not in bullish sequential order.Weekly MACD continues to turn higher (albeit in bearish territory), and Slow Stochastics are nearing overbought territory. The directional bias on higher timeframes is becoming more bullish.

GBP/JPY Technical Analysis: Daily Rate Chart (October 2018 to October 2019) (Chart 5)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

In our last GBP/JPY technical forecast update, it was noted that “a move back towards the September high at 135.75 isn’t out of the question in the near-term.” GBP/JPY rates have achieved that and more, trading at 139.62 at the time of writing.

GBP/JPY is trading above the daily 8-, 13-, and 21-EMA envelope, which is now in bullish sequential order. Slow Stochastics have risen sharply into overbought territory, while daily MACD has extended its advance to its highest level since March. GBP/JPY rates may extend their rally further towards the descending trendline resistance (dating back to the January 2018 high) as well as the 50% retracement of the 2016 to 2018 low/high range at 140.70.

IG Client Sentiment Index: GBP/JPY Rate Forecast (October 16, 2019) (Chart 6)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

GBP/JPY: Retail trader data shows 57.7% of traders are net-long with the ratio of traders long to short at 1.36 to 1. In fact, traders have remained net-long since September 27 when GBP/JPY traded near 133.14; price has moved 5.0% higher since then. The number of traders net-long is 14.3% lower than yesterday and 25.7% lower from last week, while the number of traders net-short is 7.5% lower than yesterday and 5.7% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/JPY 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 GBP/JPY price trend may soon reverse higher despite the fact traders remain net-long.

EUR/GBP Technical Analysis: Daily Rate Chart (October 2018 to October 2019) (Chart 7)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

In the last EUR/GBP 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 EUR/GBP returning to the downtrend from the August and September highs. EUR/GBP 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.

EUR/GBP Technical Analysis: Monthly Rate Chart (1994 to 2019) (Chart 8)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

EUR/GBP 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 EUR/GBP. A move below 0.8472 would suggest a significant, longer-term top has developed in EUR/GBP rates.

IG Client Sentiment Index: EUR/GBP Rate Forecast (October 16, 2019) (Chart 9)

GBP/JPY, GBP/USD Gains Build, EUR/GBP Losses Accelerate on Latest Brexit Deal Progress

EUR/GBP: Retail trader data shows 56.7% of traders are net-long with the ratio of traders long to short at 1.31 to 1. The number of traders net-long is 2.3% lower than yesterday and 24.7% higher from last week, while the number of traders net-short is 4.8% lower than yesterday and 45.4% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP 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 EUR/GBP-bearish contrarian trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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