GBP/USD: further losses likely as no-deal Brexit looms

Whether you study the fundamentals, favour technical analysis or use IG client positioning data, more weakness is possible for GBP/USD as a no-deal Brexit approaches.

GBP/USD talking points

  • The increasing likelihood of a no-deal Brexit is continuing to undermine GBP/USD
  • The pair is also looking weak from a technical viewpoint and IG retail trader sentiment data is sending out a bearish signal
  • This all means GBP/USD could extend its recent sharp decline

GBP/USD has tumbled from a high of $1.4377 in April last year to a low of $1.2080 this month, taking it back to levels last seen in January 2017. Often after such a precipitous drop, a period of consolidation is seen but fundamentally, technically and from a sentiment perspective, there are few signs yet of a forthcoming rally.

The new UK prime minister, Boris Johnson, has pledged to leave the European Union (EU) on 31 October 'do or die' – and with neither side seemingly willing to give ground, that has increased the likelihood of the UK exiting the bloc without a deal, a prospect likely to lead to further GBP selling.

In addition, the Bank of England (BoE) is widely expected to cut its benchmark interest rate from the current 0.75% in the months ahead as it weighs up the impact of a no-deal Brexit and a global economic slowdown.

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GBP/USD breaks to the downside

Meanwhile, from a technical perspective, GBP/USD has broken to the downside from a falling channel on the charts, implying further losses once the current period of consolidation has run its course. It remains in a technical downtrend, with the 200-day moving average (MA) above the 100-day MA, which is above the 50-day MA, which is in turn above the 20-day MA.

The 14-day relative strength index (RSI) remains below the 30 level, signalling the pair has been oversold but is higher than it was at the start of this month.

GBP/USD price chart, daily timeframe (30 April – 7 August 2019)

The message from an analysis of the positioning of retail traders using IG is similar. The data shows 78.1% of these traders are net-long, with the ratio of traders long to short at 3.57 to 1. In fact, traders have remained net-long since 6 May, when GBP/USD traded near $1.2981, the price has moved 6.4% lower since then. The number of traders net-long is 1% higher than yesterday and 4.7% lower from last week, while the number of traders net-short is 0.7% lower than yesterday and 11.1% lower from last week.

At DailyFX, a contrarian view is often taken to crowd sentiment, and the fact traders are net-long suggests GBP/USD 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.

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