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British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

Christopher Vecchio, CFA, Senior Strategist
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British Pound Outlook:

  • The UK economy is dealing with surging COVID-19 infections thanks to the outbreak of the omicron variant, but markets are beginning to look past the recent wave.
  • The table may be set – both fundamentally and technically – for more gains by the Sterling through the end of 2021 and into January 2022.
  • Recent changes in retail trader positioning suggest bullish biases for the major GBP-crosses.

Side-Stepping Omicron Concerns

The UK economy is dealing with surging COVID-19 infections thanks to the outbreak of the omicron variant, but markets are beginning to look past the recent wave. Data suggests that cases are proving mild, implying that there won’t be a materially negative health outcome – nor an economic one, either.

As such, traders are squarely focused on UK economic data, which for all intents and purposes has been solid over the past few weeks. The UK Citi Economic Surprise Index is currently at +53.4 after having started the month at +55.2. The final reading of 3Q’21 UK GDP came in above expectations at +6.8% y/y, and with UK inflation rates still running higher, the Bank of England appears poised to raise rates when they meet for the first time in 2022: there is a 91% chance of a 25-bps rate hike.

The cumulative effect of these factors has been a net-positive for the British Pound. Several GBP-crosses are rapidly turning higher; the British Pound is the second-best performing major currency over the past week. The table may be set – both fundamentally and technically – for more gains by the Sterling through the end of 2021 and into January 2022.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to December 2021) (CHART 1)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

GBP/USD rates may have the least appealing technical setup of the three GBP-crosses mentioned in this report; no doubt due to the ongoing strength seen by the US Dollar versus the Euro and the Japanese Yen.

Nevertheless, the pair has made considerable progress in recent days, climbing back to the September low at 1.3412 all while working to post its first two consecutive closes above its daily 21-EMA (the one-month moving average) for the first time since October 27 and 28.

The recent rally found its base at the 38.2% Fibonacci retracement of the 2020 low/2021 high range; further advances towards the 23.6% Fibonacci retracement at 1.3580 may play out in the near-term, and this level also coincides with resistance in the form of the descending trendline from the June and September swing highs.

IG Client Sentiment Index: GBP/USD RATE Forecast (December 23, 2021) (Chart 2)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

GBP/USD: Retail trader data shows 60.04% of traders are net-long with the ratio of traders long to short at 1.50 to 1. The number of traders net-long is 17.21% lower than yesterday and 19.60% lower from last week, while the number of traders net-short is 12.77% higher than yesterday and 23.77% 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 December 2021) (CHART 3)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

GBP/JPY rates are on the cusp of clearing several technical hurdles that would suggest a more bullish stance is appropriate for the next few weeks.

On a short-term basis, the pair has broken the downtrend from the October 2021 and November 2021 swing highs. On a longer-term basis, GBP/JPY rates have traded above the descending trendline from the July 2007 (all-time high) and August 2015 highs once more, while likewise climbing above the ascending trendline from the March 2020, October 2020, and September 2021 swing lows.

Price action in November and early-December may thus be considered a false bearish breakdown; we may be in the early stages of a more considerable rally unfolding over the next few weeks, ultimately targeting a return to the 2021 high at 158.22.

IG Client Sentiment Index: GBP/JPY Rate Forecast (December 23, 2021) (Chart 4)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

GBP/JPY: Retail trader data shows 39.83% of traders are net-long with the ratio of traders short to long at 1.51 to 1. The number of traders net-long is 17.01% lower than yesterday and 21.47% lower from last week, while the number of traders net-short is 14.13% higher than yesterday and 51.62% 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.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 5)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

Earlier this week it was noted that we were looking to sell rallies in EUR/GBP rates. Since then, the pair has dipped to a fresh monthly low, and bearish momentum has begun to accelerate. EUR/GBP rates are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is almost in full bearish sequential order (daily 13-EMA is still above the daily 21-EMA). Daily MACD has started to turn lower through its signal line, while daily Slow Stochastics are on the cusp of entering oversold territory. A retest of the yearly low at 0.8380 appears imminent.

IG Client Sentiment Index: EUR/GBP Rate Forecast (December 23, 2021) (Chart 6)

British Pound Technical Analysis: GBP/JPY, GBP/USD, EUR/GBP Rates Outlook

EUR/GBP: Retail trader data shows 73.68% of traders are net-long with the ratio of traders long to short at 2.80 to 1. The number of traders net-long is 25.11% higher than yesterday and 54.33% higher from last week, while the number of traders net-short is 33.12% lower than yesterday and 43.55% 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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