British Pound Outlook:
- The post-Brexit UK economy is proving resilient, particularly relative to the rest of Europe and most of the developed world, when viewed through the lens of vaccination rates.
- Both GBP/JPY and GBP/USD rates are in bullish breakout territory, while EUR/GBP rates are in bearish breakout territory.
- Retail trader positioning suggests different biases among the major GBP-crosses.
For Sterling, the Sun is Up
John Lennon comes to mind when thinking about the British Pound’s performance in 2021: “The sun is up, the sky is blue, it’s beautiful, and so are you.” The post-Brexit UK economy is proving resilient, particularly relative to the rest of Europe and most of the developed world, when viewed through the lens of vaccination rates: the UK has achieved vaccination rates (as a % of the general population) 1.5x greater than the US, and nearly 5x high for both Canada and the EU.
In the context of recent developments, ‘Super Thursday’ has come and gone, leaving markets with a fresh batch of Bank of England forecasts for growth, inflation, and employment (among other items). The recent vaccination developments have been a positive influence on UK growth expectations (allowing inflation expectations to rise in the near-term as well), and BOE policymakers more or less signaled that they would not move forth with negative interest rates. As far as this strategist is concerned, the British Pound is experiencing close to what some may consider its ‘best case scenario’ for a start to 2021.
GBP/JPY RATE TECHNICAL ANALYSIS: WEEKLY CHART (FEBRUARY 2016 TO FEBRUARY 2021) (CHART 1)
GBP/JPY rates have experienced some back-and-forth this week, and a doji candle is being carved out on the weekly timeframe. But longer-term, the context of this pause in the rally matters: GBP/JPY rates are taking a breather after clearing out the September 2020 high at 142.71. This level has been previously identified as “the key test…which in achieving would mark the end of the multi-year series of ‘lower highs and lower lows.’” The charts continue to suggest that a multi-year bottoming effort in GBP/JPY rates has commenced.
Despite the breather, GBP/JPY rates are still 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, even if there is a short-term setback.
IG Client Sentiment Index: GBP/JPY Rate Forecast (February 11, 2021) (Chart 2)
GBP/JPY: Retail trader data shows 35.71% of traders are net-long with the ratio of traders short to long at 1.80 to 1. The number of traders net-long is 8.66% higher than yesterday and 51.65% higher from last week, while the number of traders net-short is 7.10% lower than yesterday and 6.58% lower 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.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/JPY price trend may soon reverse lower despite the fact traders remain net-short.
GBP/USD RATE TECHNICAL ANALYSIS: WEEKLY CHART (FEBRUARY 2016 TO FEBRUARY 2021) (CHART 3)
GBP/USD rates hit fresh yearly highs this week, no longer consolidating after trading above the descending trendline from the November 2007 and July 2014 highs. This is yet another reinforcement of the long-held view that “breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.” With the latest turn lower by the DXY Index, GBP/USD has taken advantage of the environment.
The pair is still above its 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. Like GBP/JPY, the path of least resistance remains higher for GBP/USD rates.
IG Client Sentiment Index: GBP/USD Rate Forecast (February 11, 2021) (Chart 4)
GBP/USD: Retail trader data shows 32.72% of traders are net-long with the ratio of traders short to long at 2.06 to 1. The number of traders net-long is 2.53% lower than yesterday and 12.36% lower from last week, while the number of traders net-short is 1.16% higher than yesterday and 36.84% 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.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 TO February 2021) (CHART 5)
EUR/GBP rates are still working their way through a brief sideways shuffle following the bearish breakout attempt at the end of January. When we last checked in with this pair, it was noted that “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.”
While bearish momentum has eased in recent days, indicators remain in bearish postures. EUR/GBP rates below the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD remains deep in bearish territory despite having turned higher, while daily Slow Stochastics are nearing a move out of oversold territory. It’s worth noting that EUR/GBP rates have not recovered despite the indicators working off their stretched bearish readings, suggesting that there is still an inherent downward bias among traders.
IG Client Sentiment Index: EUR/GBP Rate Forecast (February 11, 2021) (Chart 6)
EUR/GBP: Retail trader data shows 56.80% of traders are net-long with the ratio of traders long to short at 1.31 to 1. The number of traders net-long is 2.44% higher than yesterday and 2.86% lower from last week, while the number of traders net-short is 4.74% lower than yesterday and 29.29% 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
