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British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

2020-05-18 15:45:00
Christopher Vecchio, CFA, Senior Strategist
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Brexit Latest News:

  • The EU-UK trade negotiations appear to be going poorly, leaving open the possibility that a hard Brexit materializes after all. An extension request needs to arrive before the end of June if the year-end deadline is to be avoided.
  • The three main GBP-crosses are on weak ground even as risk appetite improves; even EUR/GBP rates are perking up.
  • Retail trader positioningsuggests that the British Pound could struggle further.

British Pound Worst Performing Major Currency

The European currencies have been in for a rough ride since the start of April, but in the past week the title of worst performing currency in Q2’20 has been passed from the Euro to the British Pound. The coronavirus pandemic has resuscitated prior concerns about the UK economy falling to the back of the line when it comes to trading with the EU in the new post-Brexit world. Earlier, the two of the EU and UK lead negotiators for Brexit, contracted and recovered from COVID-19, delaying the trade negotiations that must be wrapped up before the end of 2020.

Hard Brexit Fears Revitalized Over Coronavirus

The latest round of talks between the EU and the UK failed to prove fruitful; if anything, they were rotten. Quips were exchanged at the end of last week by Michel Barnier (EU) and David Simon (UK), effectively stating that each opposing party was hypocritical and detached from reality. While there is still plenty of time to resolve any short-term differences, sustained refusal by the UK government to extend the trade deal negotiating window with the EU past the end of the year despite the coronavirus pandemic has stoked fears of a hard Brexit emerging.

In turn, traders have soured on the British Pound and measures of Sterling volatility have remained elevated. At the end of 2019, thanks to the resounding Tory party victory in the December 2019 general election, the elimination of no deal, hard Brexit provoked a sharp collapse in British Pound volatility. 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 presence of and sustained higher volatility will likely be detrimental to the British Pound.

BPVIX (GBP/USD VOLATILITY) TECHNICAL ANALYSIS: DAILY CHART (February 2015 to April 2020) (CHART 1)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

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 11.03; ahead of the UK general election in December 2019, it was trading at 13.20. While elevated, it’s worth noting that it’s more than halved from the 2020 high set on March 21 at 27.52.

GBP/USD Rate Technical Analysis: Daily Chart (May 2019 to May 2020) (Chart 2)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

GBP/USD rates set a fresh monthly low at the start of the week, but have rebounded sharply amid an otherwise robust improvement in risk appetite (thereby provoking a selloff in the safe haven currencies). Even so, the British Pound remains the worst performing currency in May and since the start of April. This may be ‘sell the rally’ type of situation, as a result.

Momentum remains weak as GBP/USD rates are below their daily5, 8-, 13-, and 21-EMA envelope, which is still aligned in bearish sequential order. Daily MACD is trending lower below its signal line, while Slow Stochastics are nestled in oversold territory. The momentum profile still favors more weakness.

IG Client Sentiment Index: GBP/USD Rate Forecast (MAY 18, 2020) (Chart 3)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

GBP/USD: Retail trader data shows 67.12% of traders are net-long with the ratio of traders long to short at 2.04 to 1. The number of traders net-long is 14.05% higher than yesterday and 49.79% higher from last week, while the number of traders net-short is 16.99% higher than yesterday and 1.18% 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.

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 GBP/USD trading bias.

GBP/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 10% 12% 11%
Weekly 6% 32% 16%
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GBP/JPY Technical Analysis: Daily Rate Chart (May 2019 to May 2020) (Chart 4)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

Like GBP/USD, GBP/JPY rates are rebounding modestly after setting fresh monthly lows, holding below their daily5, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD is trending lower below its signal line, while Slow Stochastics are holding in oversold territory. Like GBP/USD, the momentum profile for GBP/JPY continues to favor weakness.

IG Client Sentiment Index: GBP/JPY Rate Forecast (MAY 18, 2020) (Chart 5)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

GBP/JPY: Retail trader data shows 65.08% of traders are net-long with the ratio of traders long to short at 1.86 to 1. The number of traders net-long is 27.67% higher than yesterday and 42.94% higher from last week, while the number of traders net-short is 0.81% higher than yesterday and 3.47% 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.

GBP/JPY BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 11% 24% 18%
Weekly 12% 33% 23%
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EUR/GBP Technical Analysis: Daily Rate Chart (May 2019 to May 2020) (Chart 6)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

EUR/GBP rates found some room to trade higher, breaking the seven-week sideways consolidation between 0.8682 and 0.8786. But the rally into fresh monthly highs has run into resistance, with a shooting star forming on the daily candle after touching the descending trendline from the 2008 and 2016 highs. Still, EUR/GBP rates are above the daily 5-, 8-, 13-, and 21-EMA envelope (which is still in bullish sequential order). To this end, daily MACD is still rising in bullish territory and Slow Stochastics are holding in overbought territory. The momentum profile here is like that for GBP/JPY and GBP/USD rates, calling for more British Pound weakness.

IG Client Sentiment Index: EUR/GBP Rate Forecast (MAY 18, 2020) (Chart 7)

British Pound Proves Volatile as Coronavirus Impacts Brexit Talks - Key Levels for GBP-crosses

EUR/GBP: Retail trader data shows 43.39% of traders are net-long with the ratio of traders short to long at 1.30 to 1. The number of traders net-long is 3.02% higher than yesterday and 0.73% lower from last week, while the number of traders net-short is 20.22% higher than yesterday and 87.06% higher from last week.

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

EUR/GBP MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 12% 10% 10%
Weekly -3% 32% 15%
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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