British Pound Outlook:
- Despite a rebound around the June BOE meeting, the British Pound’s prospects have not meaningfully changed.
- EUR/GBP rates are continuing their bullish breakout attempt, GBP/JPY rates remain rangebound, and GBP/USD rates remain in their downtrend.
- Recent changes in retail trader positioning suggest a mixed bias for GBP/JPY and GBP/USD rates, with a bearish bias for EUR/GBP rates.
BOE’s Balanced Concerns
Last week at their June policy meeting, the Bank of England’s Monetary Policy Committee announced it would act more “forcefully” to fight “more persistent” inflation pressures, sparking a rebound in the British Pound. But as the dust has settled, particularly in the wake of the June Federal Reserve rate decision and the June Swiss National Bank rate decision, it’s evident that the BOE is still lagging the pack in terms of willingness to raise rates.
As the BOE tacks towards a more aggressive stance towards inflation, it’s worth noting that they remain among the only major central banks that is attempting to balance its concerns about a slowdown in economic growth. In turn, despite the BOE’s jawboning, rates markets continue to suggest that the BOE will lag its counterparts in terms of the pace and magnitude of rate hikes over the coming months.
Accordingly, the British Pound’s recovery may not last long. In truth, the moves last week did little to meaningfully change the current trajectory of the major GBP-crosses: EUR/GBP rates are continuing their bullish breakout attempt; GBP/JPY rates remain rangebound; and GBP/USD rates remain in their downtrend.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (June 2021 to June 2022) (CHART 1)
GBP/USD rates have experienced a V-shape recovery over the past week, but the reversal wasn’t significant enough to break the downtrend in place since the end of February. While the pair has moved above its daily 5-EMA, it remains the rest of its EMA envelope, which in totality remains in bearish sequential order. Daily MACD continues to trend lower, while daily Slow Stochastics have returned to their median line. A rally into the descending trendline from the February and April swing highs coinciding with a move to the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 1.2495 might represent the next opportunity to short GBP/USD rates.
IG Client Sentiment Index: GBP/USD RATE Forecast (June 20, 2022) (Chart 2)
GBP/USD: Retail trader data shows 74.58% of traders are net-long with the ratio of traders long to short at 2.93 to 1. The number of traders net-long is 7.39% higher than yesterday and 0.82% higher from last week, while the number of traders net-short is 15.15% higher than yesterday and 9.96% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.
GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2021 to June 2022) (CHART 3)
GBP/JPY rates may have the most bullish short-term setup among the major GBP-crosses. The pair remains well-above the descending trendline from the July 2007 (all-time high) and August 2015 highs, suggesting that we’re still in the early stages of a multi-year bullish breakout. The rally last week coincided with a move off of the 50% Fibonacci retracement of the 2015 high/2020 low range – a level that has proved significant support over the past three months (barring a brief setback at the start of May). Momentum indicators suggest that a swing higher towards the 61.8% Fibonacci retracement of the 2015 high/2020 low range at 168.42 – where the April and June highs were carved out – is possible in the near-term.
IG Client Sentiment Index: GBP/JPY Rate Forecast (June 20, 2022) (Chart 4)
GBP/JPY: Retail trader data shows 36.51% of traders are net-long with the ratio of traders short to long at 1.74 to 1. The number of traders net-long is 9.36% higher than yesterday and 77.60% higher from last week, while the number of traders net-short is 15.92% higher than yesterday and 22.65% 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.
Positioning is more net-short than yesterday but less 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 June 2022) (CHART 5)
EUR/GBP rates just set a fresh yearly high last week, and despite the sharp reversal lower, the pair continues to trade above descending channel resistance dating back to February 2021, suggesting that the bullish breakout remains on track. Momentum indicators remain bullish, with daily MACD trending higher above its signal line, while daily Slow Stochastics have stabilized around their median line. A slow, steady grind towards the 38.2% Fibonacci retracement of the 2020 high/2022 low range at 0.8698 may transpire during the remainder of June.
IG Client Sentiment Index: EUR/GBP Rate Forecast (June 20, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 60.74% 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 21.30% higher than yesterday and 8.86% higher from last week, while the number of traders net-short is 10.92% higher than yesterday and 10.56% 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
