British Pound Talking Points

GBPUSD attempts to retrace the decline from earlier this month even though the UK repeals the European Communities Act from 1972, and recent price action raises the scope for a larger correction as the Relative Strength Index (RSI) bounces back from oversold territory.

GBPUSD Rate Rebound in Focus as RSI Climbs from Oversold Territory

GBPUSD appears to be making a run at the monthly-high (1.2210) as Prime Minister Boris Johnson makes a formal appeal to the European Union (EU) to renegotiation the Brexit deal.

Efforts to avoid a no-deal Brexit should keep the British Pound afloat as it keeps the Bank of England (BoE) on track to further normalize monetary policy, and the central bank may stick to the same scrip at the next meeting on September 19 especially as US President Donald Trump looks to “move rapidly on a US-UK free trade deal.”

In turn, the Monetary Policy Committee (MPC) may reiterate that “increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target,” and Governor Mark Carney and Co. may continue to prepare UK households and businesses for higher borrowing costs as “CPI inflation is projected to rise above the 2% target, as building excess demand leads to firmer domestic inflationary pressures.”

In turn, GBPUSD may stage a larger recovery over the coming days, but retail positions remains skewed even though the exchange rate continues to track the bearish trend from earlier this year.

The IG Client Sentiment Report shows 74.3%of traders are still net-long GBPUSD compared to 81.2% at the end of July, with the ratio of traders long to short at 2.89 to 1.

In fact, traders have remained net-long since May 6 when GBPUSD traded near the 1.3100 handle even though price has moved 7.4% lower since then.The number of traders net-long is 2.8% higher than yesterday and 5.4% lower from last week, while the number of traders net-short is 2.0% higher than yesterday and 4.7% lower from last week.

The drop in net-long position is indicative of profit-taking behavior amid the recent rebound in GBPUSD, but the ongoing tilt in retail interest offers a contrarian view to crowd sentiment as both price and the Relative Strength Index (RSI) track the bearish trend from earlier this year.

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GBP/USD Rate 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 recent series of higher highs and lows points to a larger rebound in GBPUSD as the Relative Strength Index (RSI) bounces back from oversold territory and flashes a textbook buy signal.

As a result, the monthly-high (1.2210) sits on the radar, with a break/close above the 1.2240 (61.8% expansion) region opening up the former support zone around 1.2370 (50% expansion) to 1.2440 (50% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for the British Pound

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.