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British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

Christopher Vecchio, CFA, Senior Strategist
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British Pound Outlook:

  • Despite some weakness on the day, the British Pound has been noticeably resilient during the US Dollar’s recent rally – a good omen for future British Pound strength.
  • GBP/JPY and GBP/USD are in bullish breakout territory while EUR/GBP is below multi-month range support, suggesting that British Pound strength may be just getting started.
  • Retail trader positioning suggests a mixed bias to GBP rates.

Sterling Weathering the Storm

The UK is in unchartered waters, just weeks into its post-Brexit reality separated from the European Union. There have been some rude wakeup calls along the way, including the recent row over UK shellfish being banned from being sold in the EU. UK Prime Minister Boris Johnson has been criticized over his vaccine rollout plans as the B117 mutation spreads rapidly.

But trials completed by AstraZeneca – the main vaccine deployed in the UK – show that the extended inoculation period between the first and second doses doesn’t pose a significant risk in reducing the efficacy of the vaccines. This is good news for the UK (and for the prime minister), which may reach the elusive ‘herd immunity’ status faster than other developed economies. The juxtaposition against a sclerotic EU response and endless lockdowns in France, Germany, and Italy leaves the British Pound looking relatively resilient these days.

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GBP/JPY RATE TECHNICAL ANALYSIS: WEEKLY CHART (FEBRUARY 2015 TO FEBRUARY 2020) (CHART 1)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

Big picture, GBP/JPY rates have broken the descending trendline from the December 2019 and September 2020 highs, following through on the break of the downtrend from the August 2015 and December 2019 highs. I’ve previously noted that “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.’” Indeed, this has now been achieved, suggesting that a multi-year bottoming effort in GBP/JPY rates has commenced.

GBP/JPY rates are above their weekly 4, 13-, and 26-EMA envelope (one month, one quarter, and six months, respectively), which is in bullish sequential order. Weekly MACD is trending higher above its signal line, while weekly Slow Stochastics are nestled in overbought territory. The path of least resistance remains higher for GBP/JPY rates.

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IG Client Sentiment Index: GBP/JPY Rate Forecast (February 3, 2021) (Chart 2)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

GBP/JPY: Retail trader data shows 27.99% of traders are net-long with the ratio of traders short to long at 2.57 to 1. The number of traders net-long is 15.31% higher than yesterday and 2.12% higher from last week, while the number of traders net-short is 2.82% higher than yesterday and 34.20% 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.

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/JPY trading bias.

GBP/USD RATE TECHNICAL ANALYSIS: WEEKLY CHART (FEBRUARY 2016 TO FEBRUARY 2021) (CHART 3)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

GBP/USD rates are in the midst of consolidating after trading above the descending trendline from the November 2007 and July 2014 highs, and consistent with the previously articulated view that “breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.” This has been achieved. More evidence may emerge should GBP/USD get comfortable above the 76.4% Fibonacci retracement of the 2018 high/2020 low at 1.3677. GBP/USD may struggle in the near-term, however, as the DXY Index attempts to bottom.

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IG Client Sentiment Index: GBP/USD Rate Forecast (February 3, 2021) (Chart 4)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

GBP/USD: Retail trader data shows 46.13% of traders are net-long with the ratio of traders short to long at 1.17 to 1. The number of traders net-long is 11.46% lower than yesterday and 18.92% higher from last week, while the number of traders net-short is 9.88% higher than yesterday and 4.58% lower 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 more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 TO February 2021) (CHART 5)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

The last time I discussed EUR/GBP rates, nearly two months ago, it was noted that “as momentum builds towards a Brexit deal – thereby avoiding a ‘no deal, hard Brexit’ outcome – traders should keep an eye for a return to the range lows near 0.8865. Breaking through this level would be an achievement two-fold, not only breaking the multi-month range support, but cutting through symmetrical triangle support off the February and November swing lows. With a deal in tow, a EUR/GBP rate selloff below 0.8865 would put the pair in bearish breakout territory.”

In bearish breakout territory indeed we are, with EUR/GBP rates moving below 0.8865. Likewise, EUR/GBP finds itself below the descending trendline from the 2007 and 2016 highs as well as the 2008 and 2016 highs. Bearish momentum is strong, with EUR/GBP rates below the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily MACD remains deep in bearish territory while Slow Stochastics are holding steadily in oversold territory. It appears that more weakness lies ahead.

IG Client Sentiment Index: EUR/GBP Rate Forecast (February 3, 2021) (Chart 6)

British Pound Forecast: Proving Resilient, Bullish Breakouts in Progress

EUR/GBP: Retail trader data shows 56.28% of traders are net-long with the ratio of traders long to short at 1.29 to 1. The number of traders net-long is 10.82% higher than yesterday and 1.63% higher from last week, while the number of traders net-short is 4.31% lower than yesterday and 12.68% 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 more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

--- 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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