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GBP/USD Advances in Bull Flag; EUR/GBP Drops from Range - Brexit Latest

GBP/USD Advances in Bull Flag; EUR/GBP Drops from Range - Brexit Latest

2019-11-14 20:10:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Brexit Latest News:

  • The British Pound has proven resilient in recent days, keeping intact breakout opportunities versus the Euro, Japanese Yen, and US Dollar.
  • News that Brexit Party leader Nigel Farage will back Tory Party leader and UK Prime Minister Boris Johnson in the December 12 snap general election has alleviated concerns of a hung parliament.
  • Retail trader positioningpoints to a mixed trading outlook for the British Pound.

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

British Pound Rallies on Farage Support for Johnson

After news broke that the UK would seek an extension past the October 31 Brexit deadline, speculation began to swirl that UK Prime Minister Boris Johnson would hold a snap general election in order to try and break the stalemate in UK parliament. And with a December 12 snap general election declared, traders have been closely watching the polls to see if UK PM Johnson will be able to grab an outright majority, allowing him to pass his Brexit deal.

Some good news for UK PM Johnson emerged this week when Brexit Party leader, and noted Euroskeptic, Nigel Farage announced that he would not be seeking to put up Brexit Party candidates in the snap general election. It was rumored that Farage could field some 600 candidates for the upcoming election, and it was likely that the Brexit Party would split some of the vote with the Tory Party.

Now, odds have increased that UK PM Johnson and his Tory Party will grab an outright majority on December 12, sending a clear signal to markets that Brexit will proceed under the plan agreed to in October. An outcome that reduces uncertainty around Brexit – a strong showing by the Tory Party – is still seen as a positive development for the British Pound.

GBP/USD Rate Technical Analysis: Daily Chart (NOVEMBER 2018 to NOVEMBER 2019) (Chart 1)

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In our last GBP/USD rate forecast technical analysis update, it was noted that the “flag that has formed sees GBP/USD continuing to hold above the descending trendline from the April 2018 and March 2019 highs….it still holds there may be upside potential.” Indeed, as GBP/USD rates have maintained the bull flag formation, traders may want to look for outcomes yielding a strong British Pound.

Bullish momentum in GBP/USD has started to recover in recent days. GBP/USD is back above the daily5, 8-, 13-, and 21-EMA envelope. Daily MACD’s move lower in bullish territory is slowing, and Slow Stochastics have rebounded from oversold territory back to its neutral line.

It remains the case that GBP/USD continues to hold above the descending trendline from the April 2018 and March 2019 highs broken, as well as the 61.8% retracement of the “post-Brexit vote trading range” – the October 2016 low to the April 2018 high – at 1.2849. More gains may be ahead.

GBP/USD Rate Technical Analysis: Weekly Chart (NOVEMBER 2018 to NOVEMBER 2019) (Chart 2)

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Last week’s bearish piercing candle has not seen follow-through thus far this week; instead, an inside candle is forming. GBP/USD remains above the weekly 8-, 13-, and 21-EMA envelope, while weekly MACD continues to trend higherin bullish territory and Slow Stochastics are holding in overbought territory. GBP/USD continues to hold above the ascending trendline from the October 2016 and December 2018 lows, as well as the descending trendline from the April 2018 and March 2019 highs. The weekly timeframe still points to potential for more gains.

IG Client Sentiment Index: GBP/USD Rate Forecast (NOVEMBER 14, 2019) (Chart 3)

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GBP/USD: Retail trader data shows 58.52% of traders are net-long with the ratio of traders long to short at 1.41 to 1. The number of traders net-long is 1.71% lower than yesterday and 6.08% higher from last week, while the number of traders net-short is 3.55% lower than yesterday and 6.99% lower 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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias.

GBP/JPY Technical Analysis: Daily Rate Chart (NOVEMBER 2018 to NOVEMBER 2019) (Chart 4)

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The GBP/JPY sideways consolidation in place since the October 17 high/low between 138.62 and 141.51 remains in place. GBP/JPY continues to hold below 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. The October 17 low at 138.62 has not been tested yet either.

The technical perspective for GBP/JPY is less constructive for the British Pound than other GBP-crosses. GBP/JPY is still above its daily 21-EMA, but is below the daily5-, 8-, and 13-EMAs. Daily MACD has continued its downtrend over the course of November (although it remains in bullish territory). Meanwhile, Slow Stochastics have fallen its neutral line.

It still holds that a bullish breakout is not out of the question above 141.51, although traders should be open to more downside if GBP/JPY loses 138.62.

GBP/JPY Technical Analysis: Weekly Rate Chart (October 2016 to NOVEMBER 2019) (Chart 5)

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The weekly timeframe is more bullish for GBP/JPY than the daily timeframe – although the wicks on the weekly candles showcase the considerable overhead resistance. GBP/JPY rates are still completely above the weekly 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order.Weekly MACD continues to advance above its signal line into bullish territory,while Slow Stochastics are sustaining their elevation in overbought territory. Longer-term bullish potential has not dissipated despite the lack of progress on the daily timeframe.

IG Client Sentiment Index: GBP/JPY Rate Forecast (NOVEMBER 14, 2019) (Chart 6)

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GBP/JPY: Retail trader data shows 52.47% of traders are net-long with the ratio of traders long to short at 1.10 to 1. The number of traders net-long is 21.59% higher than yesterday and 33.92% higher from last week, while the number of traders net-short is 10.57% lower than yesterday and 7.22% 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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bearish contrarian trading bias.

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

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In the last EUR/GBP rate forecast technical analysis update, it was noted that “the recent pause in selling may be just that – a pause…a neutral view is appropriate, although traders should be open to more weakness in EUR/GBP below 0.8597; a bullish view would take root above 0.8716.”

EUR/GBP rates have made some progress over the week, moving below the October 16 doji candle low at 0.8597. EUR/GBP rates are still below the daily 5-, 8-, 13-, and 21-EMA envelope and Slow Stochastics are back into oversold territory, confirmation of bearish momentum. Meanwhile, daily MACD has flattened out and started to turn lower in bearish territory.

With EUR/GBP trading at 0.8561, the conditions for a bearish breakdown are in place.

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

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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 (NOVEMBER 14, 2019) (Chart 9)

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EUR/GBP: Retail trader data shows 63.30% of traders are net-long with the ratio of traders long to short at 1.72 to 1. The number of traders net-long is 0.34% higher than yesterday and 14.42% higher from last week, while the number of traders net-short is 2.68% higher than yesterday and 4.17% 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. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

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Read more: Crude Oil Price Range Resistance Holds, Keeping USD/CAD Rates Pointed Higher

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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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