EUR/GBP risks remain lower, GBP/JPY may rise on month end flows

Month and quarter end flows create choppy conditions

A rather choppy session for G10 FX with month and quarter-end flows the likely driver. In turn, with little on the domestic front for the pound, rebalancing is likely to remain in focus for the currency. GBP/USD has thus far managed to maintain a foothold above the $1.37 handle, however, with USD very much in the driving seat as firmer US yields underpin, my attention is instead focused on GBP crosses.

EUR/GBP risks remains tilted to the downside

Yesterday, EUR/GBP broke out from its month-long range, falling to £0.85. The continued vaccine advantage that the UK has over the European Union (EU) is likely to keep EUR/GBP risks tilted to the downside, particularly with the EU heading towards a third Covid-19 wave, meanwhile the UK have set out their roadmap to normalisation. Taking a look at the chart, near term support sits at £0.85 the figure with the £0.847 below, while on the topside £0.864 remains a hurdle.

EUR/GBP chart: daily time frame

GBP/JPY and month-end flows

Another GBP cross that tends to pique my interest around this time of the month is GBP/JPY, which typically performs pretty well on the final day of the trading month (particularly ahead of the 4pm London fix) as the table below shows. With that in mind, Japanese financial year (FY) end may also provide a tailwind to exacerbate the move higher, alongside the move higher in US yields.

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GBP/JPY performance on final trading day

GBP/JPY IG sentiment signals further gains

Retail trader data shows 39.19% of traders are net-long with the ratio of traders short to long at 1.55 to 1. The number of traders net-long is 6.84% higher than yesterday and 21.65% higher from last week, while the number of traders net-short is 3.07% higher than yesterday and 3.07% 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.

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