British Pound Outlook:
- The British Pound is struggling after a stretch of weak financial knowledge: progress is decrease, the labor market is slowing down, and inflation continues to roar.
- GBP/USD charges misplaced their current uptrend, GBP/JPY charges are falling under multi-month trendline help, and EUR/GBP charges are rallying from multi-month trendline help.
- Recent modifications in retail dealer positioning recommend a bullish bias for EUR/GBP and GBP/JPY charges and a bearish bias for GBP/USD charges.
Ticking the Stagflation Boxes
What is stagflation? It is often often known as the trifecta of rising unemployment charges, elevated inflation pressures, and an financial system in contraction. One by one, after the current stretch of weaker financial knowledge, the UK is ticking these bins.
Last week, the June UK GDP report confirmed that the financial system contracted within the three months by way of June (-0.1% from +0.3%). This week, May UK employment change figures missed expectations badly (160K from 296K), and the July UK inflation report (CPI) got here in a lot hotter than anticipated (+10.1% y/y from +9.4% y/y). While not technically stagflation simply but, the UK financial system continues to evolve in that path.
Ultimately, proof of stagflation plaguing the UK financial system is unhealthy information for the British Pound. Coupled with the UK prime minister race, during which frontrunner Liz Truss has prompt she would transfer to strip the Bank of England of its inflation mandate to focus solely on progress, the British Pound is in a nasty place because the second half of August unfolds.
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
After trying a bullish breakout on the finish of July, GBP/USD charges have misplaced the uptrend from the July and early-August swing lows, and have slipped under the descending trendline from the February and April highs as soon as once more. In the method, a brand new month-to-month low has been reached. The pair is under its each day 5-, 8-, 13-, and 21-EMAs, and the EMA envelope remains to be in bearish sequential order. Daily MACD is now trending decrease under its sign line, whereas each day Slow Stochastics are rapidly advancing in direction of oversold territory. As famous in mid-July, “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 (August 18, 2022) (Chart 2)
GBP/USD: Retail dealer knowledge exhibits 72.50% of merchants are net-long with the ratio of merchants lengthy to brief at 2.64 to 1. The variety of merchants net-long is 4.91% larger than yesterday and 23.98% larger from final week, whereas the variety of merchants net-short is 6.03% decrease than yesterday and 18.67% decrease from final week.
We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-long suggests GBP/USD costs might proceed to fall.
Traders are additional net-long than yesterday and final week, and the mix of present sentiment and up to date modifications provides us a stronger GBP/USD-bearish contrarian buying and selling bias.
GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)
GBP/JPY charges should still be in a triangle that has been forming since June, however are actually again under the ascending trendline from the March and May lows. Momentum indicators are providing conflicting alerts, however it seems that the trail of least resistance within the near-term is to the draw back, again in direction of triangle help which has shaped close to the 50% Fibonacci retracement of the 2015 excessive/2020 low vary at 159.94.
IG Client Sentiment Index: GBP/JPY Rate Forecast (August 18, 2022) (Chart 4)
GBP/JPY: Retail dealer knowledge exhibits 34.82% of merchants are net-long with the ratio of merchants brief to lengthy at 1.87 to 1. The variety of merchants net-long is 5.34% decrease than yesterday and 14.47% decrease from final week, whereas the variety of merchants net-short is 1.62% decrease than yesterday and 10.27% larger from final week.
We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests GBP/JPY costs might proceed to rise.
Traders are additional net-short than yesterday and final week, and the mix of present sentiment and up to date modifications provides us a stronger GBP/JPY-bullish contrarian buying and selling bias.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 5)
EUR/GBP charges have been buying and selling in a descending parallel channel since June. The early-August try to interrupt under the rising trendline from the March and April swing lows was rebuffed, and the current try to interrupt down by way of the trendline has failed once more. The pair is now on the verge of testing descending parallel channel resistance, placing into focus a possible bullish breakout alternative. Momentum continues to enhance, with EUR/GBP charges above their each day EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD’s ascent in direction of its sign line continues, whereas each day Slow Stochastics have began to trek larger in direction of overbought territory. Until the descending channel breaks – or the rising trendline from the March and April swing lows is breached – consolidation is the secret for EUR/GBP charges.
IG Client Sentiment Index: EUR/GBP Rate Forecast (August 18, 2022) (Chart 6)
EUR/GBP: Retail dealer knowledge exhibits 48.39% of merchants are net-long with the ratio of merchants brief to lengthy at 1.07 to 1. The variety of merchants net-long is 12.21% decrease than yesterday and unchanged from final week, whereas the variety of merchants net-short is 4.17% decrease than yesterday and 17.57% larger from final week.
We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests EUR/GBP costs might proceed to rise.
Traders are additional net-short than yesterday and final week, and the mix of present sentiment and up to date modifications provides us a stronger EUR/GBP-bullish contrarian buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist