British Pound Outlook:
- The British Pound continues to struggle in the wake of UK PM Johnson’s resignation.
- GBP/USD rates have hit fresh yearly lows, GBP/JPY rates remain rangebound, and EUR/GBP rates are contending with struggles on both sides of the English Channel.
- Recent changes in retail trader positioning suggest a bullish bias for GBP/JPY rates and bearish bias for EUR/GBP and GBP/USD rates.
Difficulty in the Wake of Johnson’s Resignation
The resignation of UK Prime Minister Boris Johnson has complicated the inflation fight that the Bank of England has on its hand. Without the prospect for any alterations to fiscal policy, it’s entirely on the BOE’s shoulders to manage the economy over the next two months before the next UK leader ascends. Ultimately, this means that the BOE may pay more lip service to concerns around growth, seemingly setting it back in its fight against inflation – and therefore, keeping it at the back of the pack in terms of rate hikes by major central banks.
Accordingly, the British Pound remains on relatively weak footing. GBP/USD rates have broken to fresh yearly lows, while GBP/JPY rates continue to remain rangebound. EUR/GBP rates may be the only true place for solace, as the Euro’s own issues are cropping up by the day.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (July 2021 to July 2022) (CHART 1)
GBP/USD rates set a fresh 2022 low today before barely rebounding back above 1.1800. The fact of the matter is that the downtrend in place since the end of February remains the prevailing trend. The pair is below its daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is still in bearish sequential order. Daily MACD continues to trend lower below its signal line, while daily Slow Stochastics are holding in oversold territory. A ‘sell the rally’ mindset remains appropriate as GBP/USD rates remain on track to retest their pandemic low at 1.1410 in the coming weeks.
IG Client Sentiment Index: GBP/USD RATE Forecast (July 14, 2022) (Chart 2)
GBP/USD: Retail trader data shows 80.62% of traders are net-long with the ratio of traders long to short at 4.16 to 1. The number of traders net-long is 2.48% higher than yesterday and 0.48% lower from last week, while the number of traders net-short is 20.98% lower than yesterday and 20.29% 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 (July 2021 to July 2022) (CHART 3)
GBP/JPY rates remain well-above the descending trendline from the July 2007 (all-time high) and June 2015 highs, suggesting that we’re still in the early stages of a multi-year bullish breakout. But not much progress has been made for several months now, with the pair remaining between the 50% and 61.8% Fibonacci retracements of the 2015 high/2020 low range (159.94 to 168.42). More chop within the range is likely, and no discernible directional bias is appropriate thus far.
IG Client Sentiment Index: GBP/JPY Rate Forecast (July 14, 2022) (Chart 4)
GBP/JPY: Retail trader data shows 34.40% of traders are net-long with the ratio of traders short to long at 1.91 to 1. The number of traders net-long is 11.59% lower than yesterday and 21.12% lower from last week, while the number of traders net-short is 5.93% lower than yesterday and 8.39% 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 (February 2021 to June 2022) (CHART 5)
EUR/GBP rates have reversed higher from the 61.8% Fibonacci retracement of the March low/June high range near 0.8401, but more losses may ultimately transpire. The pair is above its daily 5-EMA, but remains below its daily 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is crossing below its signal line, while daily Slow Stochastics remain in oversold territory. Further losses towards the rising trendline from the March and April swing lows closer to 0.8370 are still possible in the near-term.
IG Client Sentiment Index: EUR/GBP Rate Forecast (July 14, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 64.25% of traders are net-long with the ratio of traders long to short at 1.80 to 1. The number of traders net-long is 3.40% higher than yesterday and 12.40% higher from last week, while the number of traders net-short is 0.42% lower than yesterday and 1.72% higher 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
