British Pound Outlook:
- Hawkish commentary from the new Bank of England chief economist has lifted the British Pound.
- GBP/USD rates may face difficulty as the US Dollar remains on strong footing, but both GBP/JPY and EUR/GBP rates offer more favorable opportunities for Sterling bulls.
- Recent changes in retail trader positioning suggest different biases for the major GBP-crosses.
BOE Tilting Hawkish?
The UK economy is facing a slew of problems that may not find resolution in the near-future. Among them, elevated inflation pressures thanks to supply chain issues that have sent energy prices higher. Bank of England policymakers are starting to take note, and comments from the new Chief Economist suggest growing hawkish momentum.
Huw Pill, in his first public comments since taking over the role of BOE Chief Economist, said that the “balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long lasting than originally anticipated.”
The BOE was already shaping up to be one of the more hawkish major central banks over the coming months, and comments made by BOE Chief Economist Pill have helped provide a boost to UK Gilt yields, which in turn have helped the British Pound regain ground against its major counterparts.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to October 2021) (CHART 1)
Levity in GBP/USD rates may prove to be more feeble relative to other GBP-crosses, thanks in part to the strong technical backdrop that the US Dollar (via the DXY Index) continues to enjoy around the Federal Reserve’s own hawkish inclinations. GBP/USD has stabilized in recent days, however, after hitting fresh yearly lows just last week. Nevertheless, the pair remains below support in the triangle that was carved out from June through September.
GBP/USD also remains below its daily 21-EMA, but above its other short-term moving averages, which suggests that momentum has been neutralized. Daily MACD is trending higher but is still below its signal line, while daily Slow Stochastics have returned to their median line. It appears that the near-term path for GBP/USD rates will be sideways, lacking a directional bias.
IG Client Sentiment Index: GBP/USD RATE Forecast (October 7, 2021) (Chart 2)
GBP/USD: Retail trader data shows 56.74% 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 1.74% higher than yesterday and 33.57% lower from last week, while the number of traders net-short is 3.83% higher than yesterday and 74.27% 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse higher despite the fact traders remain net-long.
GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to October 2021) (CHART 3)
GBP/JPY rates have been trading sideways for several months, continuing the “back-and-fill [price action] after running into the descending trendline from the July 2007 (all-time high) and August 2015 highs.” For now, this point of view remains valid.
But momentum indicators are turning higher, with GBP/JPY rates above their daily 5-, 8-, 13-, and 21-EMA envelope. Daily MACD is trending higher and now through its signal line, while daily Slow Stochastics are gaining ground towards overbought territory. The pair appears to be on the verge of another attempt at the descending trendline from the July 2007 (all-time high) and August 2015 highs near 153.00 soon.
IG Client Sentiment Index: GBP/JPY Rate Forecast (October 7, 2021) (Chart 4)
GBP/JPY: Retail trader data shows 36.38% of traders are net-long with the ratio of traders short to long at 1.75 to 1. The number of traders net-long is 17.06% higher than yesterday and 13.33% lower from last week, while the number of traders net-short is 1.59% lower than yesterday and 1.89% 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.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to October 2021) (CHART 5)
A false breakout out of the bullish falling wedge may have transpired at the end of September, setting up for a reversal within the consolidation during October. EUR/GBP rates have been responding in kind, trading through their September lows in recent days. Bearish momentum is accelerating, with the pair below its daily EMA envelope, which is in bearish sequential order. Daily MACD is trending below its signal line, while daily Slow Stochastics have entered oversold territory. A drop back to the yearly low at 0.8450 is in progress; moving to wedge support at 0.8435 may take place before the month is finished.
IG Client Sentiment Index: EUR/GBP Rate Forecast (October 7, 2021) (Chart 6)
EUR/GBP: Retail trader data shows 77.79% of traders are net-long with the ratio of traders long to short at 3.50 to 1. The number of traders net-long is 0.12% lower than yesterday and 107.50% higher from last week, while the number of traders net-short is 1.66% lower than yesterday and 55.20% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
