GBP/USD at Risk for Further Losses as Brexit Negotiations Collapse

British Pound Talking Points

GBP/USD extends the decline from the monthly-high (1.2413) amid little signs of an imminent Brexit deal, and the exchange rate may exhibit a more bearish behavior ahead of the October 31 deadline as Relative Strength Index (RSI) tracks the downward trend carried over from the previous month.

GBP/USD at Risk for Further Losses as Brexit Negotiations Collapse

GBP/USD struggles to retain the advance from the September-low (1.1958) as European Commission President Jean-Claude Juncker insists that β€œthe risk of a no-deal remains real.”

At the same time, European Parliament President David Sassoli notes that the assembly β€œwould support a request from the UK government to extend the withdrawal period in order to have time for a general election or a referendum.”

It remains to be seen if the UK government will be able to secure a trade deal as Prime Minister Boris Johnsonmeets with TaoiseachLeo Varadkar ahead of the EU Summit starting on October 17, but little evidence of a Brexit deal may continue to drag on the British Pound as Business Secretary Andrea Leadsom insists that the administration β€œwill abide” to the Benn Act.

In turn, headlines surrounding Brexit may continue to sway GBP/USD as the Bank of England (BoE) retains a wait-and-see approach for monetary policy, and the central bank may stick to the same script at the next meeting on November 7 as Governor Mark Carney insist that β€œthe monetary policy response to No Deal would not be automatic.”

Nevertheless, retail sentiment remains skewed even though GBP/USD struggles to retain the advance from the September-low (1.1958), with the British Pound at risk of facing additional headwinds as UK officials will be forced to hold a general election or a second referendum for the EU to push back the Brexit deadline,

The IG Client Sentiment Report shows74.56%of traders are still net-long GBP/USD compared to 73.7% in September, with the ratio of traders long to short at 2.93 to 1.

In fact, traders have remained net-long since May 6 when GBP/USD traded near the 1.3100 handle even though price has moved 6.7% lower since then.The number of traders net-long is 0.30% lower than yesterday and 9.56% higher from last week, while the number of traders net-short is 1.85% lower than yesterday and 0.25% lower from last week.

The rise in net-long interest suggests market participants are attempting to fade the recent weakness in GBP/USD as the exchange rate appears to be stuck in a narrow range, but the persistent tilt in retail position offers a contrarian view to crowd sentiment as the exchange rate struggles to retain the advance from the yearly-low (1.1958).

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GBP/USD Rate Daily Chart

Image of GBP/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for GBP/USD is no longer constructive as the exchange rate snaps the upward trend from late last year after failing to close above the Fibonacci overlap around 1.3310 (100% expansion) to 1.3370 (78.6% expansion).
  • However, the failed attempt to break/close below the Fibonacci overlap around 1.1890 (61.8% expansion) to 1.1950 (78.6% expansion) has pushed GBP/USD out of the bearish trend carried over from May.
  • Nevertheless, the advance from the yearly-low (1.1958) appears to have stalled ahead of the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2640 (38.2% expansion), with lack of momentum to hold above the 1.2240 (61.8% expansion) region raising the risk for a move towards the 1.2100 (61.8% expansion) handle.
  • Will keep a close eye on the Relative Strength Index (RSI) as the oscillator continues to track the bearish formation carried over from September.

For more in-depth analysis, check out the 4Q 2019 Forecast for the British Pound

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.