Technical Analysis: Cautious Optimism on GBP
GBP/USD Grinding Higher, Stretched Positioning Presents a Risk
As Q1 comes to a close, much of the early quarter gains in GBP/USD have been largely retraced after peaking at 1.4235. Meanwhile, the close below the 50DMA confirms that the pair has topped out in the short-term, in which losses could extend towards the 100DMA and a multi-month rising trendline below. Furthermore, speculative net-long positioning in GBP/USD is nearing stretched levels and thus reinforces the risk that a washout in positioning could take the pair towards 1.35.
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However, a move to the 200DMA would be a stretch too far in our view, particularly as the prior short-term top (Aug 2020) saw a 5% pullback, while the current pullback is at circa 4%. That said, heading into Q2 we remain cognisant that GBP/USD is approaching a seasonally-strong month (April), in which the pair has risen 9 out of the last 10 years with an average gain of 1.6%. A factor we cannot discount and could quite easily put 1.40 back in focus. Yet, while we are entering the Pound’s best month, its weakest average month is directly on its heels in May. All in all, we remain cautiously optimistic that the Pound can grind higher and would be more encouraged by this view, should the multi-month uptrend remain intact.
GBP/USD Daily Chart
GBP/USD Net Speculative Positioning (% of OI) – 3yr z-score
EUR/GBP Range Respected as Fundamentals Wait For The Techs To Align
It has been a one-way trade for EUR/GBP since the beginning of the year with the cross down 4% YTD. The unwind of a Brexit risk-premium and a favourable vaccine rollout program has been among the key factors behind the persistent slide. That said, the fundamentals continue to support the view that the bearish trend can continue with the UK announcing a roadmap to normalisation, while the EU are heading towards their third Covid wave. Looking at the chart, technical haven’t necessarily aligned with the fundamentals as of yet, given EUR/GBP has consolidated between 0.8540-0.8640 since the backend of February.
Meanwhile a bullish divergence on the RSI has also act to halt the downtrend. The bears, however, will take comfort in the RSI’s failure to break above 50 with the cross continuing to respect the well-defined range. For Q2 the range break will be the first area of interest with a break below likely to see an extension of losses toward 0.8400-0.8450. Should the cross make a convincing break above, a recovery could take EUR/GBP back to 0.8750. Although, a recovery is likely to represent attractive levels for renewed selling should the trend remain below 0.8850.
EUR/GBP Daily Chart