The Pound to Dollar Rate Can Now Rise Back to 1.26, or Even 1.28
The big surge seen in the GBP/USD exchange rate seen earlier this week was one of the pair's best daily performances in over 23 years and has allowed for an upside breakout from the pair’s descending channel.
This is significant from a technical perspective and it advocates for further gains.
This breakout is a strong bullish technical sign as it infers a continuation of the uptrend to a level which is the same distance (y) above the channel, as the height of the channel (x), indicating a probable target at roughly the 1.2600 level.
Directly above Tuesday’s 1.2415 highs lies a tough resistance zone (see red hatching) composed of the 50-day MA and the monthly pivot (PP), which is likely to be an obstacle to further progress higher.
Nevertheless, we expect the exchange rate to rise and eventually reach the target calculated from the height of the channel at 1.2600.
A break above the monthly pivot, signaled by a move above 1.2475 would provide stronger confirmation of the extension.
Analysts More Confident on Sterling's Outlook
Analysts at Credit Suisse are meanwhile happy to allow for a move higher in GBP/USD back towards December 2016 highs.
“If the UK economy is beating expectations for growth, GBP weakness is very likely a key contributor and persistent currency strength would not be welcome for UK policymakers,” says Credit Suisse Research Analyst, Shahab Jalinoos in recent foreign exchange forecast update to clients.
This sounds to us as though the Bank of England would lean against any strength in the Pound.
However, Credit Suisse have noted that the recently revealed Brexit plans are not as negative as initially anticipated.
“While it's true that leaving the single market comes under the banner of a hard outcome, it's also the case that the promise of parliamentary votes and transitional deals can be taken as silver linings by those hoping for a more measured and less confrontational end outcome with relatively low market and economic volatility," says Jalinoos.
The analyst also notes little appetite for a second referendum in Scotland and political uncertainty in the Eurozone as being reasons why the big sell-off in Sterling might have ended.
They therefore no longer envisage the 10% drop previously anticipated on a hard-Brexit outcome.
But when it comes to direction, Credit Suisse prefer taking a "sell rallies" view on GBP longer term,”
They advocate selling GBPUSD towards the December highs at around 1.28.
Scotiabank’s Shaun Osborne is also more positive about the outlook for Sterling, saying that most of the bad news must be priced in now and the ‘only way is up’ so to speak.
Nevertheless, he highlights ongoing Brexit risks citing news that, “HSBC may move a significant portion of its banking staff to out of London”.
He is also constructive about the Dollar, however, after commentary from Fed officials suggested a continued strong case for raising interest rates.
“The USD rebound follows comments from San Francisco Fed President Williams, who remarked that the economy had reached the Fed’s “maximum employment goal” and was nearing its inflation target, which made further (gradual) rate increases appropriate,” said Osborne.
