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.
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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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