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British Pound Begins Countdown to Hard Brexit – The End is Nigh?

Brexit Latest News:

  • Without an extension in place, the UK is on a path to formally Brexit in a ‘hard’ fashion: without a new EU-UK trade deal.
  • The end is nigh? Not quite. The context in which this is occurring – against the backdrop of the coronavirus pandemic – means that even a late request for an extension to the transition period is likely to be granted.
  • Retail trader positioning sees conflicting signals among the majors GBP-crosses.
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Recommended by Christopher Vecchio, CFA

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No EU-UK Trade Deal, for Now

The British economy is in duress owing to the pandemic-driven recession and market participants are becoming anxious over whether or not Brexiting as fast as possible is the best path forward. The key June 30 Brexit transition period extension request deadline has now passed, leaving the British Pound in a greater state of uncertainty as the COVID-19 outbreak continues to weigh on global growth prospects.

Now that the June 30 extension request deadline has come and gone, we see ourselves on a path where a hard Brexit is once again a distinct possibility. And that creates an environment where volatility in the British Pound takes on a bias tilted to the upside.

If we do see a rise in volatilitythe backdrop of the Sterling and local assets will shift materially. With general risk aversion high and in some regards still rising across the globe, this situation would lead us to the opinion that the British Pound is likely to be treated as a more at-risk currency and underperform relative to other currencies.

Hard Brexit on the Horizon?

Now that the self-imposed deadline for an extension has passed and the UK has not received an extension from the EU, then in theory, the time horizon has solidified for a full Brexit (of the hardest variety: retaining access to the EU via World Trading Organization (WTO) rules).

If the EU and the UK are unable to reach an agreement before the end of 2020, then we are looking at a situation where the UK will lose all of its access to its privileges and it will be treated as if it were a brand new country, meaning it would be treated as if it were subject to WTO. The UK would have to pay substantial taxes, higher tariff rates and the cost of goods coming into the UK would increase significantly – all of which would hurt British businesses and households.

What does this mean? There is nothing stopping the EU and the UK from negotiating for a new extension. True, this is an agreement between people; we’re not dealing with the laws of nature, i.e. gravity. The context in which this is occurring – against the backdrop of the coronavirus pandemic – means that even a late request for an extension to the transition period is likely to be granted.

But with each passing day, the uncertainty around the British Pound will grow a little bit more, increasing likelihood of there being a much more volatile outcome for the British Pound – for both bulls and bears.

GBP/USD Rate Technical Analysis: Daily Chart (July 2019 to July 2020) (Chart 1)

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GBP/USD rates saw a meaningful uptick higher in the final trading days of June, but contextually, it may not mean much. The parallel descending channel in place relative to the June swing high and mid-month swing low shows that GBP/USD rates remain within the short-term bearish structure; further to this point, GBP/USD rates are below the rising trendline from the March 2020 coronavirus pandemic crash lows.

Momentum remains weak, even as GBP/USD rates have nudged above their daily5, 8-, 13-, and 21-EMA envelope, which is still aligned in bearish sequential order. Daily MACD is trending lower at its signal line, while Slow Stochastics are moving back towards neutral. While the short-term profile has become less bearish, the downside remains the favored outcome at this time. It will take a move above 1.2700 to convince markets (well, at least this strategist) that GBP/USD gains are not fleeting.

IG Client Sentiment Index: GBP/USD Rate Forecast (JULY 2, 2020) (Chart 2)

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GBP/USD: Retail trader data shows 48.16% of traders are net-long with the ratio of traders short to long at 1.08 to 1. The number of traders net-long is 22.41% lower than yesterday and 5.16% lower from last week, while the number of traders net-short is 20.18% higher than yesterday and 7.15% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD 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/USD-bullish contrarian trading bias.

GBP/USD BULLISH

Data provided by

of clients are net long. of clients are net short.

Change inLongsShortsOI
Daily-8%18%4%
Weekly-9%10%0%

GBP/JPY Technical Analysis: Daily Rate Chart (July 2019 to July 2020) (Chart 3)

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Like GBP/USD, GBP/JPY rates are contending with the rising trendline from the March 2020 coronavirus pandemic crash lows; unlike GBP/USD, GBP/JPY rates are above this trendline. Further strength in equity markets caters to a stronger GBP/JPY, although price action at the start of July has not seen much strength – dojis forming on the first two candles of the month following a bounce higher.

While GBP/JPY rates are above their daily5, 8-, 13-, and 21-EMA envelope, it remains in bearish sequential order. Daily MACD has risen in bearish territory back to its signal line, while Slow Stochastics are rebounding towards their median line. Between the two pairs, GBP/JPY rates, at the moment, have a more bullish profile.

IG Client Sentiment Index: GBP/JPY Rate Forecast (JULY 2, 2020) (Chart 4)

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GBP/JPY: Retail trader data shows 61.36% of traders are net-long with the ratio of traders long to short at 1.59 to 1. The number of traders net-long is 5.73% higher than yesterday and 19.09% higher from last week, while the number of traders net-short is 6.69% lower than yesterday and 30.25% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/JPY 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/JPY-bearish contrarian trading bias.

GBP/JPY MIXED

Data provided by

of clients are net long. of clients are net short.

Change inLongsShortsOI
Daily7%8%8%
Weekly6%-25%-10%

EUR/GBP Technical Analysis: Daily Rate Chart (July 2019 to July 2020) (Chart 5)

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EUR/GBP rates have been on a steady rise higher the past several weeks, ever since breaking out of the seven-week sideways consolidation between 0.8682 and 0.8786. The rally in context of the rising parallel channel has recently met resistance at the descending trendline from the 2008 and 2017 highs.

Despite the pullback, the rising parallel channel remains intact, and the daily 5-, 8-, 13-, and 21-EMA envelope remains in bullish sequential order). To this end, daily MACD remains in bullish territory and Slow Stochastics have neutralized back to their median line. While near-term price action has weakened momentum, the technical perspective remains bullish; a break below 0.8980 would invalidate this point of view.

IG Client Sentiment Index: EUR/GBP Rate Forecast (JULY 2, 2020) (Chart 6)

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EUR/GBP: Retail trader data shows 47.83% of traders are net-long with the ratio of traders short to long at 1.09 to 1. The number of traders net-long is 37.29% higher than yesterday and 27.44% higher from last week, while the number of traders net-short is 7.51% lower than yesterday and 0.73% lower 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse lower despite the fact traders remain net-short.

EUR/GBP BEARISH

Data provided by

of clients are net long. of clients are net short.

Change inLongsShortsOI
Daily41%-4%13%
Weekly31%-8%8%

The Coronavirus Pandemic Changed Brexit’s Trajectory

In December last year, after the Tory party’s general election trouncing, public opinion was in favor of a Brexit as soon as possible, with the plan to finish the transition period with a completed trade deal by December 31, 2020. But the circumstances have changed over the past six-plus month thanks to the coronavirus pandemic.

In fact, the UK has seen a spike in COVID-19 cases over the last several weeks, sparking the UK’s death rate to exceed many of its neighboring countries, ultimately triggering the erosion of UK Prime Minister Boris Johnson’s popularity.

As the coronavirus perspective has worsened and government approval has eased in the UK, the opinion polls that once supported Brexit as soon as possible have shifted: now, more Brits are saying they don’t need to leave as soon as possible, with suggestions the government should request an extension something that the EU is willing to grant.

Effectively during the transition period, the UK gets all the benefits of being a full-fledged member of the EU. And the EU is okay with the UK retaining those privileges for a longer period of time due to the uncertainties brought on by the coronavirus pandemic. Retaining this market access will make the UK’s economic recovery that much easier in a post-coronavirus pandemic world.

Are we on a path to a hard Brexit? Yes. Will it happen? There’s still plenty of time to change course.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist