GBP/USD: Brexit-fuelled rise at risk to long bets and resistance

Pound sterling IG client sentiment talking points

• The pound gained after 'no-deal' Brexit fears cooled
• IG client sentiment is showing a GBP/USD bearish bias
• Will falling resistance maintain the dominant downtrend?

GBP/USD IG client sentiment outlook - bearish

The pound has been cautiously rising versus the US dollar on headlines that have helped to cool worries about a 'no-deal' Brexit to a certain extent. This is as UK Prime Minister Boris Johnson and European Commission president Jean-Claude Juncker prepare to discuss options on replacing the Irish backstop, a sticking point in withdrawal talks. But what do positioning and technical analysis have to say for GBP/USD?

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long GBP/USD suggests that prices may continue falling. However, since 9 August the percentage of traders biased to the upside has declined from about 80% to 70%. Unsurprisingly, the currency pair climbed about 2%. But recent changes in IG client sentiment are now offering a stronger bearish contrarian trading bias.

As of 27 August, traders are further net-long than the previous day and week respectively. If interest in going long sterling increases, we may see the currency resume weakness against the US dollar. On the flip side of the spectrum, should net-long GBP/USD positioning continue unwinding, there may be more room for the currency pair to recover.

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GBP/USD client positioning

Pound sterling technical analysis – will trend-defining resistance hold?

Meanwhile, on the daily chart, GBP/USD has run into trend-defining falling resistance from late April. This has been keeping the dominant down move intact after it was tested in June and July. If it holds, we may see GBP/USD turn lower towards near-term support at $1.2109, which is around the March 2017 low. Clearing it opens the door to testing 2019 lows which are a part of the psychological barrier between $1.1950 and $1.2018.

This area of support could be traced back to the lows witnessed in 2016 and 2017. A turn lower in the currency is also possible amid negative relative strength index (RSI) divergence which shows fading upside momentum. Yet, when it comes to technical analysis, be mindful that past performance is not indicative of future results. Confirming a close above falling resistance from April - the red parallel lines on the chart below - opens the door to testing the next area of interest at $1.2366.

GBP/USD daily chart

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