British Pound Forecast: Bullish Breakouts on Pace, or At Least on Precipice - Levels for GBP/JPY, GBP/USD Rates
British Pound Forecast Overview:
- With the good comes the bad, and vice-versa, for the British Pound. But a look at both the GBP/JPY and GBPUSD rates charts shows that the British Pound has been mostly sidestepping these growing risks.
- GBP/JPY rates are continuing with their bullish breakout, while GBP/USD rates may not be far behind.
- Retail trader positioning suggests a bearish bias to GBP rates.
Sterling Sidesteps Growing Risks
2021 has been a mixed bag for the British Pound thus far. Brexit has been resolved, but questions remain over London’s role as a global financial center. Vaccines are on the way, but the mutant variant originating in the British Isles has thrown the UK back into lockdowns, and accelerating infection rates worldwide foreshadow a deadly winter season. More stimulus may be coming, but it may not be vis-à-vis negative interest rates.
With the good comes the bad, and vice-versa, for the British Pound. But a look at both the GBP/JPY and GBPUSD rates charts shows that the British Pound has been mostly sidestepping these growing risks. GBP/JPY rates have already cleared key trendline resistance dating back to 2019, while GBP/USD rates have been spending more time trading above the 2020 highs.
GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 TO January 2021) (CHART 1)
Throughout December 2020, we were “on alert for bullish breakout potential in GBP/JPY rates.” GBP/JPY rates have started their bullish breakout attempt, having broken the descending trendline from the December 2019 and September 2020 highs (which comes months after breaking the downtrend from the August 2015 and December 2019 highs). The key test will come at the September 2020 high at 142.71, which in achieving would mark the end of the multi-year series of ‘lower highs and lower lows.’
GBP/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics are nestled in overbought territory. The path of least resistance remains higher for GBP/JPY rates, for now, and the outlook could improve upon trading up and through 142.71.
IG Client Sentiment Index: GBP/JPY Rate Forecast (January 14, 2021) (Chart 2)
GBP/JPY: Retail trader data shows 34.39% of traders are net-long with the ratio of traders short to long at 1.91 to 1. The number of traders net-long is 3.25% lower than yesterday and 15.60% lower from last week, while the number of traders net-short is 10.19% higher than yesterday and 45.51% 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.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2018 TO January 2021) (CHART 3)
GBP/USD rates have broken above the descending trendline from the November 2007 and July 2014 highs, and we’ve previously suggested “breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.” Consistent with this outlook, GBP/USD rates may not be in the throes of a bullish breakout yet, but appear on the precipice of the bullish breakout: breaking above the 2021 high at 1.3704 would also see the 76.4% Fibonacci retracement of the 2018 high/2020 low at 1.3677 broken as well. The tandem of these developments would provide greater support for a longer-term bullish GBP/USD perspective.
IG Client Sentiment Index: GBP/USD Rate Forecast (January 14, 2021) (Chart 4)
GBP/USD: Retail trader data shows 40.60% of traders are net-long with the ratio of traders short to long at 1.46 to 1. The number of traders net-long is 16.67% higher than yesterday and 8.30% lower from last week, while the number of traders net-short is 17.75% lower than yesterday and 22.94% 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.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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