British Pound Outlook:
- The Russian invasion of Ukraine has provoked meaningful downside, even as British Pound losses have reversed.
- Technical studies continue to suggest more weakness in the GBP-crosses, but long wicks on the daily candles hint at forthcoming stability.
- Recent changes in retail trader positioning suggest a bearish bias for EUR/GBP, GBP/JPY, and GBP/USD rates.
Opening the Matryoshka Doll
European currencies have been under a great deal of pressure over the past 24-hours following the formal Russian invasion of Ukraine. UK Prime Minister Boris Johnson announced significant sanctions against Russian financial institutions, beginning to follow through on his promise to “open up the Matryoshka dolls of Russian-owned companies, and Russian-owned entities to find the ultimate beneficiaries within.”
And while global financial markets initially took the news rather negatively, calmness has started to take root; hope springs eternal. The US, UK, and their NATO allies don’t appear willing to commit military forces to Ukraine’s defense, and the sanctions levied aren’t targeting Russian President Vladimir Putin directly – nor has Russia’s access to the SWIFT payments system been revoked.
In turn, the prospects for further escalation appear to be contained, at least at the moment. There has been a dramatic turnaround in all asset classes, with gold prices turning negative, oil prices giving up their gains, stocks turning positive, and the battered European currencies – the British Pound included – clawing back from their worst losses of the day.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 1)
While GBP/USD rates are well off their daily lows, the technical damage has been done. The uptrend from the December 2021 and January 2022 lows is broken, with the pair having also fallen back below the descending trendline from the June and October 2021 highs. Bearish momentum has accelerated, with GBP/USD rates below their daily 5-, 8-, 13-, and 21-EMA envelope. Daily MACD has dropped below its signal line, while daily Slow Stochastics are on the cusp of falling below their median line. The prospects of a more significant recovery may be limited as long as Russian aggression in Ukrainian territory continues; sideways chop is likely.
IG Client Sentiment Index: GBP/USD RATE Forecast (February 24, 2022) (Chart 2)
GBP/USD: Retail trader data shows 60.82% of traders are net-long with the ratio of traders long to short at 1.55 to 1. The number of traders net-long is 10.19% higher than yesterday and 25.07% higher from last week, while the number of traders net-short is 31.71% lower than yesterday and 40.48% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias.
GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 3)
GBP/JPY rates have turned sharply lower, even though a long lower wick suggests buying interest is returning quickly. Despite the losses, the pair continues to hold above the descending trendline from the July 2007 (all-time high) and August 2015 highs, as well as the ascending trendline from the March 2020 and December 2021 swing lows. A symmetrical triangle continues to be carved out with a genesis in October 2021, meaning that more consolidation appears on the horizon before a more significant breakout transpires.
IG Client Sentiment Index: GBP/JPY Rate Forecast (February 24, 2022) (Chart 4)
GBP/JPY: Retail trader data shows 31.04% of traders are net-long with the ratio of traders short to long at 2.22 to 1. The number of traders net-long is 11.01% lower than yesterday and 5.83% lower from last week, while the number of traders net-short is 31.80% lower than yesterday and 26.83% 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.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 5)
EUR/GBP rates are surprisingly higher on the session, but not before briefly touching their lowest level since February 4. The charts speak to a lack of clarity right now, suggesting that, among the three major GBP-crosses, this would be the one to stay away from at present time. EUR/GBP rates have returned to their daily 21-EMA, with no sequential ordering in the EMA envelope. Daily MACD’s descent below its signal line is eroding, while daily Slow Stochastics have turned higher before reaching oversold territory. Further advances may play out, however, as the Russia-Ukraine crisis gives the Bank of England pause with respect to a March rate hike, of which markets are currently pricing in greater than a 100% chance.
IG Client Sentiment Index: EUR/GBP Rate Forecast (February 24, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 76.70% of traders are net-long with the ratio of traders long to short at 3.29 to 1. The number of traders net-long is 11.00% lower than yesterday and 2.13% lower from last week, while the number of traders net-short is 11.06% lower than yesterday and 13.99% 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
