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British Pound Outlook:

  • The British Pound is struggling after a stretch of weak economic data: growth is lower, the labor market is slowing down, and inflation continues to roar.
  • GBP/USD rates lost their recent uptrend, GBP/JPY rates are falling below multi-month trendline support, and EUR/GBP rates are rallying from multi-month trendline support.
  • Recent changes in retail trader positioning suggest a bullish bias for EUR/GBP and GBP/JPY rates and a bearish bias for GBP/USD rates.

Ticking the Stagflation Boxes

What is stagflation? It is commonly known as the trifecta of rising unemployment rates, elevated inflation pressures, and an economy in contraction. One by one, after the recent stretch of weaker economic data, the UK is ticking those boxes.

Last week, the June UK GDP report showed that the economy contracted in the three months through June (-0.1% from +0.3%). This week, May UK employment change figures missed expectations badly (160K from 296K), and the July UK inflation report (CPI) came in much hotter than anticipated (+10.1% y/y from +9.4% y/y). While not technically stagflation just yet, the UK economy continues to evolve in that direction.

Ultimately, evidence of stagflation plaguing the UK economy is bad news for the British Pound. Coupled with the UK prime minister race, in which frontrunner Liz Truss has suggested she would move to strip the Bank of England of its inflation mandate to focus solely on growth, the British Pound is in a bad position as the second half of August unfolds.

GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

After attempting a bullish breakout at the end of July, GBP/USD rates have lost the uptrend from the July and early-August swing lows, and have slipped below the descending trendline from the February and April highs once again. In the process, a new monthly low has been reached. The pair is below its daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is still in bearish sequential order. Daily MACD is now trending lower below its signal line, while daily Slow Stochastics are quickly advancing towards oversold territory. As noted in mid-July, “a ‘sell the rally’ mindset remains appropriate as GBP/USD rates remain on track to retest their pandemic low at 1.1410 in the coming weeks.”

IG Client Sentiment Index: GBP/USD RATE Forecast (August 18, 2022) (Chart 2)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

GBP/USD: Retail trader data shows 72.50% of traders are net-long with the ratio of traders long to short at 2.64 to 1. The number of traders net-long is 4.91% higher than yesterday and 23.98% higher from last week, while the number of traders net-short is 6.03% lower than yesterday and 18.67% 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.

GBP/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

GBP/JPY rates may still be in a triangle that has been forming since June, but are now back below the ascending trendline from the March and May lows. Momentum indicators are offering conflicting signals, but it appears that the path of least resistance in the near-term is to the downside, back towards triangle support which has formed near the 50% Fibonacci retracement of the 2015 high/2020 low range at 159.94.

IG Client Sentiment Index: GBP/JPY Rate Forecast (August 18, 2022) (Chart 4)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

GBP/JPY: Retail trader data shows 34.82% of traders are net-long with the ratio of traders short to long at 1.87 to 1. The number of traders net-long is 5.34% lower than yesterday and 14.47% lower from last week, while the number of traders net-short is 1.62% lower than yesterday and 10.27% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/JPY-bullish contrarian trading bias.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 5)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

EUR/GBP rates have been trading in a descending parallel channel since June. The early-August attempt to break below the rising trendline from the March and April swing lows was rebuffed, and the recent attempt to break down through the trendline has failed again. The pair is now on the verge of testing descending parallel channel resistance, putting into focus a potential bullish breakout opportunity. Momentum continues to improve, with EUR/GBP rates above their daily EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD’s ascent towards its signal line continues, while daily Slow Stochastics have started to trek higher towards overbought territory. Until the descending channel breaks – or the rising trendline from the March and April swing lows is breached – consolidation is the name of the game for EUR/GBP rates.

IG Client Sentiment Index: EUR/GBP Rate Forecast (August 18, 2022) (Chart 6)

British Pound Forecast: UK Stagflation Fears Weigh – Setups for GBP/JPY, GBP/USD, EUR/GBP

EUR/GBP: Retail trader data shows 48.39% of traders are net-long with the ratio of traders short to long at 1.07 to 1. The number of traders net-long is 12.21% lower than yesterday and unchanged from last week, while the number of traders net-short is 4.17% lower than yesterday and 17.57% higher from last week.

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

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bullish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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