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GBP/JPY, GBP/USD Extend Gains Ahead of UK General Election - Brexit Latest

GBP/JPY, GBP/USD Extend Gains Ahead of UK General Election - Brexit Latest

2019-12-09 17:00:00
Christopher Vecchio, CFA, Senior Strategist
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Brexit Latest News:

  • Polls have cooled off in recent days, but signs still point to UK Prime Minister Boris Johnson’s Tory party winning a commanding majority after the UK general election on December 12.
  • As GBP-crosses continue to extend their gains to multi-month highs for the British Pound, one can’t help but wonder if the UK general election will be a ‘buy the rumor, sell the news’ type of event.
  • Retail trader positioningcontinues to point to a mixed trading outlook for the British Pound despite gains in recent days.

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

British Pound Continues to Gain Ground

The British Pound has been the best performing major currency since the start of October, when it became clear that the UK would avoid a no deal, hard Brexit outcome thanks to a last minute deal between UK Prime Minister Boris Johnson and his EU counterparts.

The period of reprieve for the British Pound, from the end of October until late-November, was a result of market participants having little confidence over which way the UK general election would break. Then the polls arrived.

In late-November, YouGov’s UK general election MRP poll – which predicted 93% of the seats correctly in the 2017 UK general election – predicted that the Tories would win 359 seats, while Labour would win 211 seats. This would be a net-gain of 48 seats for the Tory Party. Now, the latest update to the YouGov/MRP model suggests the Tories will win a majority of 38 seats.

Most Likely Outcome: Boris Johnson Wins

For now, markets continue to price in the most likely outcome of a sizeable majority for the Tory party when the UK general election officially comes to a close after December 12. But given the shear scale of the British Pound rally since the start of October, and given the fact that polls are beginning to shift back into the ‘margin of error’ territory, it would be irresponsible to ignore the fact that the odds of a ‘hung parliament’ are creeping higher again.

Indeed, if UK PM Johnson fails to win a commanding majority in the UK general election, the past two-plus months of trading in the British Pound may have been setting up a ‘buy the rumor, sell the news’ type of situation. Traders may want to be cautious with their British Pound exposure as the UK general election results are tallied.

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

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In our last GBP/USD rate forecast update, it was noted 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.”

Momentum has remained strong over the past week-plus, with GBP/USD rates still above their daily5, 8-, 13-, and 21-EMA envelope. Daily MACD is trending higher in bullish territory while Slow Stochastics are nestled in overbought territory.

A break above the May high at 1.3177 may inspire false confidence given the looming threat of the UK general election. Should UK PM Johnson win a strong majority, further gains towards the 38.2% retracement of the ‘post-Brexit vote trading range’ at 1.3432 can’t be ruled out. Anything less than a commanding majority that suggests a no deal, hard Brexit may still transpire could see GBP/USD rates quickly decline back towards the 61.8% retracement at 1.2849.

IG Client Sentiment Index: GBP/USD Rate Forecast (DECEMBER 9, 2019) (Chart 2)

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GBP/USD: Retail trader data shows 45.22% of traders are net-long with the ratio of traders short to long at 1.21 to 1. The number of traders net-long is 19.33% higher than yesterday and 6.39% lower from last week, while the number of traders net-short is 5.78% higher than yesterday and 29.26% higher from last week.

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

GBP/JPY Technical Analysis: Daily Rate Chart (December 2018 to December 2019) (Chart 3)

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In our last GBP/JPY rate forecast update, it was noted that “GBP/JPY rates in recent weeks has morphed from a symmetrical triangle into an ascending triangle; in context of the move higher in October, both consolidations favor topside resolution.” GBP/JPY has broken to the topside as of December 4.

GBP/JPY is above 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. Among the indicators, GBP/JPY is trading clear and free above the daily5-, 8-, 13-, and 21-EMA envelope. Daily MACD has turned in bullish territory while Slow Stochastics have moved into overbought territory.

But for the UK general election (which can upend all technical expectations), the GBP/JPY profile is evidently bullish.

IG Client Sentiment Index: GBP/JPY Rate Forecast (DECEMBER 9, 2019) (Chart 4)

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GBP/JPY: Retail trader data shows 48.20% of traders are net-long with the ratio of traders short to long at 1.07 to 1. The number of traders net-long is 10.79% higher than yesterday and 4.05% lower from last week, while the number of traders net-short is 4.09% higher than yesterday and 19.46% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/JPY prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/JPY price trend may soon reverse lower despite the fact traders remain net-short.

EUR/GBP Technical Analysis: Daily Rate Chart (December 2018 to December 2019) (Chart 5)

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EUR/GBP rates continue to remain within the downtrend from the August and October highs, but now EUR/GBP rates have dropped below 0.8460/80, an area that held up as support going back to May 2017. Now, post-Brexit trading range lows may come into focus closer towards 0.8300 over the coming weeks.

The momentum profile remains bearish, with EUR/GBP rates below the daily 5-, 8-, 13-, and 21-EMA envelope while daily MACD is declining in bearish territory and Slow Stochastics are holding in oversold territory.

IG Client Sentiment Index: EUR/GBP Rate Forecast (DECEMBER 9, 2019) (Chart 6)

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EUR/GBP: Retail trader data shows 71.05% of traders are net-long with the ratio of traders long to short at 2.45 to 1. The number of traders net-long is 1.40% higher than yesterday and 8.22% higher from last week, while the number of traders net-short is 24.47% higher than yesterday and 4.24% higher 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.

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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