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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 three major GBP-crosses continue to evolve in a manner that points to more British Pound strength.
  • Better than expected UK labor market data and inflation topping estimates suggest that the Bank of England will hike rates again in March.
  • Recent changes in retail trader positioning suggest a bullish bias for GBP/USD rates, a bearish bias for EUR/GBP rates, and a mixed outlook for GBP/JPY rates.

Data Points to More BOE Hikes

Coming into this week, the British Pound was contending with cautious commentary from Bank of England Chief Economist Huw Pill. Last week, he commented that he worried “that taking unusually large policy steps may validate a market narrative that Bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake.” Data over the past few days has seemingly persuaded traders that a November 2021-esque disappointment is unlikely materialize at the March BOE meeting.

The UK labor market report for November and December 2021 showed that the economy was more resilient than anticipated in the face of COVID-19 omicron variant concerns. The January UK inflation rate report (CPI) topped estimates, with price pressures rising to a fresh 30-year high. The net-result has been a rise in BOE rate hike expectations in March, which are providing a tailwind for the major GBP-crosses.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 1)

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

GBP/USD rates have turned higher through the 23.6% Fibonacci retracement at 1.3580, in the process treating the descending trendline from the June and October 2021 swing highs as support. Bullish momentum continues to build, with the pair above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is turning higher above its signal line, while daily Slow Stochastics are close to entering overbought territory. Further gains into 1.3700, the descending trendline from the June 2021 and January 2021 swing highs, are expected in the coming sessions.

IG Client Sentiment Index: GBP/USD RATE Forecast (February 17, 2022) (Chart 2)

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

GBP/USD: Retail trader data shows 42.48% of traders are net-long with the ratio of traders short to long at 1.35 to 1. The number of traders net-long is 9.43% lower than yesterday and 14.04% lower from last week, while the number of traders net-short is 19.56% higher than yesterday and 18.09% 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.

GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 3)

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

GBP/JPY rates continue to build above the descending trendline from the July 2007 (all-time high) and August 2015 highs once more, while likewise climbing higher above the ascending trendline from the March 2020 and December 2021 swing lows. The pair is above its daily EMA envelope, which is in bullish sequential order. Daily MACD is rising while above its signal line, and daily Slow Stochastics have turned higher above their median line.

While GBP/JPY rates thus far been capped by the descending trendline from the October 2021 and January 2022 swing highs, bullish momentum continues to accelerate, suggesting a return to the 2021 high at 158.22 may not be far away.

IG Client Sentiment Index: GBP/JPY Rate Forecast (February 17, 2022) (Chart 4)

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

GBP/JPY: Retail trader data shows 25.91% of traders are net-long with the ratio of traders short to long at 2.86 to 1. The number of traders net-long is 3.00% higher than yesterday and 5.07% lower from last week, while the number of traders net-short is 0.51% higher than yesterday and 0.34% 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 (February 2021 to February 2022) (CHART 5)

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

EUR/GBP rates have reversed slowly but surely since the February ECB and BOE meetings, treating their daily 21-EMA as resistance amid the rebound over the past few days. The daily EMA envelope is now in bearish sequential order, with the pair below its daily 5-EMA. Daily MACD has turned lower through its signal line, while daily Slow Stochastics are on the cusp of crossing below their median line. A further drop is eyed in the coming sessions back to the 2022 low set at 0.8284.

IG Client Sentiment Index: EUR/GBP Rate Forecast (February 17, 2022) (Chart 6)

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

EUR/GBP: Retail trader data shows 74.31% of traders are net-long with the ratio of traders long to short at 2.89 to 1. The number of traders net-long is 6.35% higher than yesterday and 24.87% higher from last week, while the number of traders net-short is 12.59% lower than yesterday and 33.97% 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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