British Pound Strength vs US Dollar Wanes, Trade Data is Bullish

By Rob Samson

export data to drive GBP exchange rate complex

The British Pound exchange rate complex enjoyed hefty gains against an under pressure US dollar while showing strength against the majority of major currencies. Can today's trade data cement the sterling's strength?

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Bullish bias preferred above 1.6460

This update courtesy of Luc Luyet at Swissquote:

"GBP/USD rose sharply higher yesterday, breaking the resistances at 1.6684 and 1.6718 (see also the declining trendline). Resistances can now be found at 1.6786 and 1.6823. The short-term bullish momentum is intact as long as the hourly support at 1.6684 (previous resistance) holds. Another support lies at 1.6556.
 
"In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. A major resistance stands at 1.7043 (05/08/2009 high)." (Click below to enlarge.)

pound dollar rate

Bank of America Merrill Lynch stand by bullish USD case

This note from BofA Merrill Lynch shows they are standing by what was once a ubiquitous assumption that 2014 will be the year of USD strength:

"How do you position for a strong US recovery, with low inflation and a weak USD? We have been bullish on the US economy, short US rates and long USD. Although the market has not proved us right yet, we are standing our ground.

"However, we also see a risk that low inflation could allow the Fed to take its time tightening, which could keep the USD weak, despite an accelerating US recovery. We believe that this is a low probability risk for the longer term, but may be a higher risk for the short term and, therefore, worth considering. How should US bulls position if they do not want to fight the Fed by being long USD?"

Can the US dollar recover vs the GBP tonight?

Federal Reserve and US dollar The surprise in the market is the pound versus the US dollar.

Sasha Nugent at Caxton FX says that while we are near 3 year highs, tonight's Fed action could scupper the rally:

"Whilst it seemed unlikely to challenge the 1.67 mark yesterday, upon this release the rate propelled to 1.6750 where it is now sitting. This presents an opportune moment for dollar buyers as the rate is not too far from the 3 year highs that were triggered one month ago. Tonight brings the Fed's meeting minutes and surely dollar sellers must be praying there is something tangible in there to help strengthen and aid a floundering dollar."

Technicals turn bullish for GBP

ipekIpek Ozkardeskaya confirms the outlook has turned positive for the UK unit ahead of the Bank of England verdict due tomorrow:

"Technicals turned bullish pre-BoE verdict tomorrow. BoE is likely to keep the status quo in April MPC meeting; option bets trail above 1.6640 / 1.6700 / 1.6725 to 1.6800 for tomorrow’s expiry. The key resistance stands at 1.6823 (Feb 17th high)."

Good news, but not enough for £

The good news on the UK's improving trade balance has not had any major impact on GBP. Technical trading and dynamics impacting the US dollar are likely to be the order of the day from here.

Trade data beats expectations

A GBP-positive outcome from today's headline trade data.

Goods Trade Balance (Feb): Read @ £-9.094B, expectations were for a worse reading of £-9.200B.

The Trade Balance; non-EU (Feb) read @ £-2.919B, a deficit lower than the predicted £-3.400B.

EUR-GBP could continue falling

The team at Roboforex have the following warning on the potential for further weakness in the euro pound exchange rate:

"The pair is moving downwards and I decided to move stop on my sell order into the black. Bears are supported by Super Trends. Price is already moving below the 3/8 level, which means that instrument may continue falling down towards the 0/8 one."

euro pound exchange rate

Buying the Cable is an obvious strategy

Sean Lee at FXWW, a professional retail trader, advocates purchase of the GBP:

"The USD is losing friends across the board and with pairs like EUR/GBP starting to break lower again, buying dips in cable looks like a very obvious strategy. The consolidation period is now over in my view and I’d expect a new bullish range between 1.66/1.70.

"On the day, there is decent resistance between 1.6770/1.6820 which will attract profit takers and any dips onto the 1.66 handle will surely see stale shorts on the bid."

Upside momentum to wane

In their morning briefing Lloyds Bank warn the GBP-USD's upside is likely to run out of steam:

"UK Trade data this morning will be of interest. However, we do not expect the numbers will trigger much market reaction. There is not much in the way of key resistance levels for GBP/USD from current levels up to the year’s high of 1.6823; the 1.6785 area (the March high) may provide some initial resistance. However, we expect the GBP/USD upside momentum to ease today as the market waits for FOMC minutes."

Trade data lies ahead

export data due today RBS analyst Paul Robson earlier this week talked of the threat to the strength of the British pound posed by an unbalanced recovery. The UK must ultimately match the growth in consumer spending with exports to create a sustainable recovery.

Today we get some insights into the matter with the release of the latest trade data from the ONS at 09:30.

Goods Trade Balance (Feb), expected to remain in deficit at £-9.200B.

Trade Balance; non-EU (Feb), expected to read at £-3.40B.

We reckon that a positive surprise will extend yesterday's rally at best and cement it at the very least.

Sterling holds onto gains vs EUR and USD

The UK currency is holding recent advances against the majors.

The pound to dollar exchange rate is holding onto yesterday's gains; the rate is seen at 1.6743.

The pound euro exchange rate is at 1.2145 - holding onto the gains made over the past 24 hours.

However, broad-based USD weakness has aided the commodity dollar bloc; so expect the potential for further weakness against the AUD and NZD.

The past 24 hours for the UK pound

manufacturing industrial production dataThe tale of the pound sterling (GBP) over the past 24 hours, as recounted by analyst Piet Lammens at KBC Markets:

"On Tuesday, the news flow on the UK was unequivocally positive for sterling. The UK February Industrial and manufacturing production showed monthly growth of 0.9% and 1.0% M/M respectively while only a 0.3% growth was expected.

"The monthly NIESR GDP estimated was reported at a strong 0.9% for March and the IMF revised the 2014 UK growth prospects upward. Especially the strong production data suggested that the UK economy might fill the output  gap sooner than expected by the BoE.

"Cable jumped above the 1.67 barrier  after the publication of the production report. EUR/GBP dropped to the  0.8235/45 area even as the euro was well bid, too."