Bullish Technicals Overcoming Bearish Seasonality

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

Technical Forecast for the British Pound: Bullish

British Pound Rates Week in Review

The second week of May brought more gains for the British Pound against all of the major currencies, which is now the top performer this month. The ‘risk-off’ nature of global equity markets combined with the pullback in commodity prices saw the British Pound rack up its greatest gains against the antipodean currencies, with GBP/AUD and GBP/NZD rates rallying by +1.57% and +1.21%, respectively.

Meanwhile, even among the safe havens, Sterling shined: GBP/JPY jumped +1.49%; GBP/USD added +0.74%; and GBP/CHF gained +0.89%. Heading into the second half of May, the British Pound is in a better technical position to build upon the first half of the month’s gains.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to May 2021) (CHART 1)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

GBP/USD rates have been making slow but steady progress higher as they work their way through a bullish breakout from a descending triangle formation that formed from mid-February to mid-April. Now, GBP/USD rates find themselves back at the ascending trendline from the March and November 2020 lows, the pandemic uptrend.

Now that the pair is treating the daily EMA envelope as support, evidence is building that bullish momentum is gathering. Likewise, daily MACD is trending higher above its signal line and daily Slow Stochastics are holding near overbought territory. More gains may be ahead as the pair seeks to reclaim the base of the aforementioned descending triangle as well as the yearly high at 1.4241.

IG Client Sentiment Index: GBP/USD RATE Forecast (May 14, 2021) (Chart 2)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

GBP/USD: Retail trader data shows 41.55% of traders are net-long with the ratio of traders short to long at 1.41 to 1. The number of traders net-long is 3.76% higher than yesterday and 6.62% higher from last week, while the number of traders net-short is 0.18% lower than yesterday and 8.22% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

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

GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 to May 2021) (CHART 3)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

GBP/JPY rates are the best positioned among the three GBP-crosses mentioned in this report. Fresh yearly highs emerged last week, and it appears that some basing may be occurring above the former yearly high set at the start of April. The daily EMA envelope is converging into the former high at 153.41, which also was the daily bearish key reversal candle high on April 6. Daily MACD is trending higher above its signal line and daily Slow Stochastics are nestled in overbought territory. A rally to the 2020 high at 156.61 may be soon approaching.

IG Client Sentiment Index: GBP/JPY Rate Forecast (May 14, 2021) (Chart 4)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

GBP/JPY: Retail trader data shows 33.66% of traders are net-long with the ratio of traders short to long at 1.97 to 1. The number of traders net-long is 9.63% higher than yesterday and 13.72% lower from last week, while the number of traders net-short is 3.29% lower than yesterday and 25.60% 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.

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

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 to May 2021) (CHART 5)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

EUR/GBP rates have traded choppily in recent weeks, and for better or for worse, a sideways range has been carved out between the 61.8% (0.8747) and 76.4% (0.8569) Fibonacci retracements of the 2020 high/low range. A lack of conviction among momentum indicators, as well as the fact that the pair is currently enmeshed among its daily 5-, 8-, 13-, and 21-EMA envelope offers little conviction for a directional bias at present time.

IG Client Sentiment Index: EUR/GBP Rate Forecast (May 14, 2021) (Chart 6)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

EUR/GBP: Retail trader data shows 62.36% of traders are net-long with the ratio of traders long to short at 1.66 to 1. The number of traders net-long is 5.21% lower than yesterday and 29.56% higher from last week, while the number of traders net-short is 0.54% higher than yesterday and 22.29% lower 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 less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.

CFTC COT British Pound Futures Positioning (May 14, 2020 to May 14, 2021) (Chart 7)

Weekly British Pound Technical Forecast: Bullish Technicals Overcoming Bearish Seasonality

Finally, a consideration of positioning in the futures market. According to the CFTC’s COT for the week ended May 11, speculators increased their net-long British Pound positioning to 28.2K contracts from 19. contracts held in the week prior. Futures positioning and GBP/USD spot rates have held a statistically significant positive correlation over the past six months at +0.89.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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