Analys från DailyFX
Two Key Factors Favor further British Pound Weakness versus US Dollar
– British Pound fails to hold key highs versus Dollar
– A major reversal in forex sentiment suggests it set major high
– Holding below key resistance at $1.6820 keeps price reversal intact
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The British Pound has once again failed at significant resistance against the US Dollar. Why might this be the start of a larger GBPUSD move lower?
Last week we warned that the British Pound was at particular risk versus the US Dollar for two key reasons: an important weekly technical reversal pattern and the potential for a sentiment extreme underlined downside risk. We’ve since seen price fall further, while retail FX positions have likewise pulled back from extremes.
GBPUSD Holds Below Important Resistance, Testing Key Support as Price Pulls Back
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
Forex trading crowds recently hit their most short GBPUSD on record. We typically go against the herd; if everyone’s short we prefer to be long and vice versa. Yet the majority of traders are often their most long at key lows and their most short at key tops. The catch is that these extremes are only clear in hindsight.
Short interest has fallen by as much as 50 percent while long interest is up the same amount as the British Pound has fallen nearly 200 pips from Friday’s high. There is obviously no guarantee that this is indeed the start of the larger reversal, but we can’t ignore the clear warning sign.
Retail Forex Sentiment Warns that GBPUSD May Have Set Important Top
Source: FXCM Execution Desk Data, Chart Prepared by David Rodriguez
Our Senior Technical Strategist believes that the Sterling could soon trade to $1.6450 as it continues to trade below the 2/17 high of $1.6822. A relatively empty week of UK economic event risk suggests there are few foreseeable catalysts for the move. Yet we’ll likewise note that Cable remains strongly correlated to UK Government debt yields.
We might look to next week’s Bank of England Meeting Minutes to spark the next big move in GBP pairs.
Data source: Bloomberg, Prepared by David Rodriguez
Forex Correlations Summary
View forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.
Contact and follow David via Twitter: https://twitter.com/DRodriguezFX
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
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You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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