Brexit Latest News:
- With the UK government refusing to extend the trade deal negotiating window with the EU past the end of the year despite the coronavirus pandemic, traders are starting to sour on the Sterling.
- Several GBP-crosses are on tenuous footing as risk appetite sours anew; GBP/JPY and GBP/USD rates may be most vulnerable.
- Retail trader positioning nevertheless suggests that the British Pound could rally in the days ahead.
British Pound Among Weakest Currencies in April
The British Pound, like the Euro and Swiss Franc, has been enduring a rough month of April. The third worst performing major currency coming into this week, the coronavirus pandemic has largely overshadowed any prior concerns about the economy in the new post-Brexit world.
But in light of the fact that Michael Barnier and Boris Johnson, two of the EU and UK lead negotiators for Brexit, respectively, contracted and recovered from COVID-19, there has been a delay in the trade negotiations that must be wrapped up before the end of 2020.
Hard Brexit Fears Revitalized Over Coronavirus
With the UK government refusing to extend the trade deal negotiating window with the EU past the end of the year despite the coronavirus pandemic, traders are starting to sour on the Sterling and measures of volatility are starting to rise. Months earlier, the elimination of no deal, hard Brexit fears helped volatility collapse. Like other asset classes such as bonds and stocks, currencies associated with higher volatility tend to underperform. Heightened volatility in FX markets typically means greater uncertainty around monetary and fiscal policy. In this case, the return of higher volatility should be detrimental to the British Pound.
BPVIX (GBP/USD VOLATILITY) TECHNICAL ANALYSIS: DAILY CHART (February 2015 to April 2020) (CHART 1)
British Pound volatility (as measured by the Cboe’s GBP/USD volatility ETF, BPVIX, which tracks the 1-month implied volatility of GBP/USD as derived from option chains) was trading at 12.62; ahead of the UK general election in December 2019, it was trading at 13.20. Being a far cry from the 2020 high set on March 21 at 27.52, there is plenty of room for volatility to expand once more if the coronavirus pandemic proves to compound hard Brexit fears anew.
GBP/USD Rate Technical Analysis: Daily Chart (April 2019 to April 2020) (Chart 2)
GBP/USD rates may prove vulnerable in the coming days now that the uptrend from the yearly low set on March 20 has been broken. Momentum continues to weaken as GBP/USD rates are below their daily5, 8-, 13-, and 21-EMA envelope, which is beginning to align in bearish sequential order. Daily MACD is trending lower, nearing a cross below its signal line, while Slow Stochastics are dropping towards their median line. Failure below the April 7 swing low at 1.2164 would increase the odds of a move back towards the yearly lows.
IG Client Sentiment Index: GBP/USD Rate Forecast (APRIL 21, 2020) (Chart 3)
GBP/USD: Retail trader data shows 45.09% of traders are net-long with the ratio of traders short to long at 1.22 to 1. The number of traders net-long is 2.57% lower than yesterday and 27.99% lower from last week, while the number of traders net-short is 3.69% higher than yesterday and 21.11% 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.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.
| Change in | Longs | Shorts | OI |
| Daily | 4% | -8% | 1% |
| Weekly | 0% | -12% | -3% |
GBP/JPY Technical Analysis: Daily Rate Chart (April 2019 to April 2020) (Chart 4)
Like GBP/USD, GBP/JPY rates have lost their uptrend from the March lows, raising the likelihood of a turn lower over the coming sessions. Momentum is turning lower as GBP/JPY rates are below their daily5, 8-, 13-, and 21-EMA envelope, which is beginning to align in bearish sequential order. Daily MACD is trending lower, nearing a cross below its signal line, while Slow Stochastics are dropping below their median line. More weakness may be exposed upon a close below monthly low at 132.47.
IG Client Sentiment Index: GBP/JPY Rate Forecast (APRIL 21, 2020) (Chart 5)
GBP/JPY: Retail trader data shows 36.31% of traders are net-long with the ratio of traders short to long at 1.75 to 1. The number of traders net-long is 6.70% lower than yesterday and 34.12% lower from last week, while the number of traders net-short is 6.21% higher than yesterday and 28.57% higher 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.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bullish contrarian trading bias.
| Change in | Longs | Shorts | OI |
| Daily | 3% | -7% | -4% |
| Weekly | 0% | -17% | -12% |
EUR/GBP Technical Analysis: Daily Rate Chart (April 2019 to April 2020) (Chart 6)
The British Pound’s weakness isn’t isolated to the safe havens; EUR/GBP rates look to turn higher soon as well, regardless of the Euro’s own issues. But EUR/GBP rates may be finding some room to trade higher nonetheless, now that the spot rate has exceeded the daily 5-, 8-, 13-, and 21-EMA envelope (which is still in bearish sequential order). To this end, daily MACD is still declining in bearish territory and Slow Stochastics have only recently exited oversold condition. The profile here is a bit softer with respect to the potential for weakness in the British Pound, relatively to GBP/JPY and GBP/USD rates.
IG Client Sentiment Index: EUR/GBP Rate Forecast (APRIL 21, 2020) (Chart 7)
EUR/GBP: Retail trader data shows 63.08% of traders are net-long with the ratio of traders long to short at 1.71 to 1. The number of traders net-long is 4.07% higher than yesterday and 31.31% higher from last week, while the number of traders net-short is 9.86% lower than yesterday and 30.88% 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.
| Change in | Longs | Shorts | OI |
| Daily | 2% | 2% | 2% |
| Weekly | 15% | -21% | -7% |
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
