British Pound Forecast: Digesting Gains Around Spring Budget

British Pound Outlook:

• After a strong run higher, the British Pound may be due for a period of pullback, if not consolidation, before further gains. But longer-term technical studies suggest more strength for Sterling.
• Reaction to the UK Spring Budget was muted among the major GBP-crosses, not a surprise given that the contents of the budget are known ahead of the official parliamentary unveiling.
• The latest shifts in retail trader positioning suggest different biases among the major GBP-crosses.

UK Spring Budget a Reason to Pause

The red briefcase has made its first bi-annual appearance of 2021, with UK Chancellor of the Exchequer Rishi Sunak delivering the UK Spring Budget. You can read my colleague Justin McQueen’s notes on the UK Spring Budget here. Overall, the reaction to the UK Spring Budget was muted among the major GBP-crosses, not a surprise given that the contents of the budget are known ahead of the official parliamentary unveiling.

Now, as global bond yields tick higher, forcing investors to reassess their asset allocation decisions, the trading conditions that help prop up the British Pound have changed. But after a strong run higher, the British Pound may be due for a period of pullback, if not consolidation, before further gains. Longer-term technical studies suggest more strength for Sterling, even if various GBP-crosses trade sideways or lower in the near-term.

GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (November 2019 to March 2021) (CHART 1)

In the prior British Pound forecast update, it was noted that “the charts continue to suggest that a multi-year bottoming effort in GBP/JPY rates has commenced…the path of least resistance remains higher for GBP/JPY rates, even if there is a short-term setback.” When the last update was published, GBP/JPY was trading at 143.75; it has now cleared out the 2019 high at 148.87, trading at 149.23 at the time this report was written.

GBP/JPY rates are still above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. But daily MACD is trending lower while above its signal line, and daily Slow Stochastics have recently dropped out of overbought territory (though are turning higher again). It also seems that GBP/JPY rates are starting to carve out a potential sideways channel against the yearly high, which in context of the preceding price action would suggest a bull flag is forming. This may portend to a period of directionless churn for the next several sessions, if not into the middle of the month.

IG Client Sentiment Index: GBP/JPY Rate Forecast (March 3, 2021) (Chart 2)

GBP/JPY: Retail trader data shows 43.81% of traders are net-long with the ratio of traders short to long at 1.28 to 1. The number of traders net-long is 59.31% higher than yesterday and 68.04% higher from last week, while the number of traders net-short is 6.53% lower than yesterday and 3.06% 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/JPY price trend may soon reverse lower despite the fact traders remain net-short.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (FEBRUARY 2020 TO MARCH 2021) (CHART 3)

GBP/USD rates hit fresh yearly highs at the end of February, but quickly came back to its moving averages when the US Treasury yield spike gave the greenback some legs. Nevertheless, our condition for a longer-term bottom has been met, with the pair “ “breaching 1.3539 and sustaining a breakout move higher would indicate a long-term bottom has formed in GBP/USD rates.”

Momentum has faded in GBP/USD rates quickly. Daily MACD is trending lower at an accelerating rate, while daily Slow Stochastics have dropped below their median line. GBP/USD’s daily EMA envelope remains in bullish sequential order, but the spot rate is below the daily 5-EMA. Like GBP/JPY, however, GBP/USD rates may be carving out a sideways channel against the yearly high, and like GBP/JPY, the preceding price action would suggest a bull flag is forming. This flag has support at 1.3859 and resistance at 1.4241.

IG Client Sentiment Index: GBP/USD Rate Forecast (March 3, 2021) (Chart 4)

GBP/USD: Retail trader data shows 54.74% of traders are net-long with the ratio of traders long to short at 1.21 to 1. The number of traders net-long is 16.52% higher than yesterday and 57.47% higher from last week, while the number of traders net-short is 6.10% lower than yesterday and 26.57% 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.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to March 2021) (CHART 5)

In the last update it was noted that “EUR/GBP rates have not recovered despite the indicators working off their stretched bearish readings, suggesting that there is still an inherent downward bias among traders.” Indeed, even as EUR/GBP has carved out a sideways channel against the yearly low, prices have not recovered meaningfully – even if the indicators have lost their extreme readings.

EUR/GBP rates below the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD continues to rise out of the depths of bearish territory, while daily Slow Stochastics have already jumped above their median line. In context of the symmetrical triangle bearish breakout, any consolidation see in EUR/GBP rates would be seen as a bear flag with support at 0.8539 and resistance at 0.8731.

IG Client Sentiment Index: EUR/GBP Rate Forecast (March 3, 2021) (Chart 6)

EUR/GBP: Retail trader data shows 59.97% of traders are net-long with the ratio of traders long to short at 1.50 to 1. The number of traders net-long is 8.08% higher than yesterday and 7.79% lower from last week, while the number of traders net-short is 0.42% higher than yesterday and 1.69% 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.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist