British Pound Forecast: Bullish Breakouts for GBP/JPY, GBP/USD; EUR/GBP in Triangle
Brexit Latest News:
- With risk appetite on the rise and the US Dollar on the ropes, the British Pound has been able to build on recent bullish momentum. Now, GBP/JPY and GBP/USD rates are looking at near-term bullish breakout scenarios.
- Even though the UK economy continues to inch towards a hard Brexit, the latest round of negotiations taking place in London offer some hope, as does another round of talks in August.
- Retail trader positioningsees conflicting signals among the majors GBP-crosses.
Attention Returns to Brexit?
The British Pound has slowly but surely clawing back some of its coronavirus pandemic losses in recent weeks, enjoying what has been a quiet yet positive July largely on the back of a continually weakening US Dollar. In part, as the United States bears much of the financial media world’s attention due to the escalating nature of the COVID-19 outbreak, Brexit and the late-June deadline have gone under the radar.
But Brexit is back in the spotlight, now that the next round of negotiations between the EU and the UK have opened up for a three-day meeting in London. Expectations for an agreement in any form – even an extension to the transition period, never mind a full trade deal – are extremely low. UK Prime Minister Boris Johnson is reportedly resigned to the idea that the August talks will be the last such talks, even if they yield no movement.
British Pound Ignores Hard Brexit Threat, For Now
Brexit would appear to becoming a threat to the British Pound once again, if you squint far enough into the future. But the very nature of the market – leaning hopeful thanks to all of the stimulus provided by central banks and governments, as well as promising news on the coronavirus vaccine front – means that bad news has been and continues to be discounted, if not outright ignored.
What does this mean? There is nothing stopping the EU and the UK from negotiating for a new extension. True, this is an agreement between people; we’re not dealing with the laws of nature, i.e. gravity. The context in which this is occurring – against the backdrop of the coronavirus pandemic – means that even a late request for an extension to the transition period is likely to be granted, and the negotiations could drag on until the very end of the year. Contextually, this allows traders to ignore the threat of a hard Brexit in the near-term.
To be clear, a hard Brexit would be bad for the British Pound. If the EU and the UK are unable to reach an agreement before the end of 2020, then we are looking at a situation where the UK will lose all of its access to its privileges and it will be treated as if it were subject to WTO rules. The UK would have to pay substantial taxes, higher tariff rates and the cost of goods coming into the UK would increase significantly – all of which would hurt British businesses and households, especially during a fragile recovery.
GBP/USD Rate Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 1)
GBP/USD rates have made meaningful improvement in recent days, sustaining their elevation after being rejected at the descending trendline from the December 2019, March 2020, and June 2020 highs. To this end, price action in the second half of July has seen this descending trendline yield to a bullish breakout attempt; in context of the rising trendline from the March 2020 and June 2020 swing lows, it appears that a symmetrical triangle has formed and given way to a bullish move.
Further to this point, GBP/USD rates are attempting to climb back above the ascending trendline from the October 2016 and January 2019 lows as well, which has been an area of interest on numerous occasions over the past year (grey shaded boxes on Chart 1).
Momentum is strong, even as GBP/USD rates have just begun their bullish breakout attempt. GBP/USD rates are above their daily5, 8-, 13-, and 21-EMA envelope, which is aligned in bullish sequential order. Daily MACD is trending higher in bullish territory, while Slow Stochastics are moving back into overbought territory. If GBP/USD rates are able to retake the June high at 1.2814, it would hold that the path of least resistance is still to the topside, with targets coming into play near 1.3200 towards the end of Q3’20.
IG Client Sentiment Index: GBP/USD Rate Forecast (JULY 20, 2020) (Chart 2)
GBP/USD: Retail trader data shows 48.16% of traders are net-long with the ratio of traders short to long at 1.08 to 1. The number of traders net-long is 22.41% lower than yesterday and 5.16% lower from last week, while the number of traders net-short is 20.18% higher than yesterday and 7.15% 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.
GBP/JPY Technical Analysis: Daily Rate Chart (July 2019 to July 2020) (Chart 3)
GBP/JPY rates have been on stronger footing than GBP/USD rates, continuing a trend that was noted in early-July. But like the GBP/USD prognosis at the start of the month, the outlook for GBP/JPY should have been more optimistic (hindsight is 20/20). In reaching fresh monthly highs today, GBP/JPY rates have also returned to the 38.2% retracement of the 2018 high/2020 low range at 136.45.
Yet whereas GBP/USD rates have already started their bullish breakout attempt from the symmetrical triangle in place dating back to the December 2019 high and March 2020 low, GBP/JPY rates have not; triangle resistance is closer towards 137.50 over the coming days. GBP/JPY rates are above their daily5, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD has risen in bullish territory above its signal line, while Slow Stochastics are returning into overbought territory.
IG Client Sentiment Index: GBP/JPY Rate Forecast (JULY 20, 2020) (Chart 4)
GBP/JPY: Retail trader data shows 61.36% of traders are net-long with the ratio of traders long to short at 1.59 to 1. The number of traders net-long is 5.73% higher than yesterday and 19.09% higher from last week, while the number of traders net-short is 6.69% lower than yesterday and 30.25% 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 (July 2019 to July 2020) (Chart 5)
EUR/GBP rates have been trading sideways through July, warranting a reconsideration of the idea that a breakout from a seven-week sideways consolidation between 0.8682 and 0.8786 was in process. Instead, it may be the case that – like GBP/JPY and GBP/USD – a symmetrical triangle has formed. Still, it holds that the EUR/GBP rally has met resistance at the descending trendline from the 2008 and 2017 highs.
Despite the pullback from long-term resistance, the symmetrical triangle remains in place. EUR/GBP rates are above the daily 5-, 8-, 13-, and 21-EMA envelope (which is losing bullish sequential order). To this end, daily MACD remains in bullish territory but is turning lower, while Slow Stochastics have started to turn back to their median line. While near-term bullish momentum has weakened, the technical perspective remains bullish; a break below 0.8937 (July 10 low) would invalidate this point of view.
IG Client Sentiment Index: EUR/GBP Rate Forecast (JULY 20, 2020) (Chart 6)
EUR/GBP: Retail trader data shows 47.83% of traders are net-long with the ratio of traders short to long at 1.09 to 1. The number of traders net-long is 37.29% higher than yesterday and 27.44% higher from last week, while the number of traders net-short is 7.51% lower than yesterday and 0.73% lower 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.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse lower despite the fact traders remain net-short.
The Coronavirus Pandemic Changed Brexit’s Trajectory
In December last year, after the Tory party’s general election trouncing, public opinion was in favor of a Brexit as soon as possible, with the plan to finish the transition period with a completed trade deal by December 31, 2020. But the circumstances have changed over the past six-plus month thanks to the coronavirus pandemic.
As the coronavirus perspective has worsened and government approval has eased in the UK, the opinion polls that once supported Brexit as soon as possible have shifted: now, more Brits are saying they don’t need to leave as soon as possible, with suggestions the government should request an extension – something that the EU is willing to grant.
Effectively during the transition period, the UK gets all the benefits of being a full-fledged member of the EU. And the EU is okay with the UK retaining those privileges for a longer period of time due to the uncertainties brought on by the coronavirus pandemic. Retaining this market access will make the UK’s economic recovery that much easier in a post-coronavirus pandemic world.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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