Buying the GBP/USD is a Conviction Trade at Westpac
"For a second week in a row we have two bullish arrows on GBP giving us a buy on weakness signal." - Westpac on their bullish GBP to USD conviction.
The British pound has shot higher against the US dollar over the course of February ensuring a solid base to the longer-term downtrend is formed. The lion's share of the move to above 1.40 comes courtesy of the weaknes in the US dollar.
However, sterling has been undermined by the Bank of England on Thursday when forecasts for the UK economy came in below expectations ensuring GBP was sold across the board.
However, tehncical analysts are sticking with the near-term GBP recovery story suggesting there is scope for a move higher.
Martina Song at Westpac Bank has issued a strategy note to clients suggesting they buy GBP/USD into 1.4330 with a stop-loss placed at 1.4150.
Buying the GBPUSD rate is actually a conviction trade at Westpac.
“For a second week in a row we have two bullish arrows on GBP giving us a buy on weakness signal. Our model remains downbeat but our macro and technical views are aligned,” says Song.
According to Song Brexit risk is overdone (a view incidentally shared with the team at ING) as UK polls are a poor guide to the national mood if polling for the last general election and Scottish independence are anything to go by.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3335▲ + 0.06%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2881 - 1.2935 |
**Independent Specialist | 1.3148 - 1.3201 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Karen Jones of Commerzbank notes there is scope for further gains:
"GBP/USD has rallied towards the 1.4568 April 2015 low and 1.4625. While this may hold the initial test, we note the Elliott wave count on the daily chart is implying scope to the 1.4790/1.4965 zone and this remains viable. Intraday dips lower are indicated to hold circa 1.4530/1.4460."
The market will have to move sub 1.4330 to alleviate upside pressure and retarget 1.4151.
However, Jones is realistic on sterling's longer-term prospects noting that momentum still overwhelmingly favours the US dollar.
"Last weeks low at 1.4151 guards the January low at 1.4083. Below it lies the minor psychological 1.4000 region. The 1.3502 January 2009 low remains our primary target medium term but first we still expect a minor bounce to be seen
But, Hantec’s Richard Perry suggests the rally has legs noting the strength of the momentum in this rally is now such that a long term downtrend on the RSI that dates all the way back to May 2015 has been broken.
"This suggests the bulls have the upper hand now and that corrections should be seen as a chance to buy," says Perry.
Above: Courtesy of Hantec Markets
US Dollar, Down But Not Out
2016 may not be kind to the US dollar it is argued by Standard Chartered, whose forecasts for the year ahead we covered here.
On the evidence of February's price action so far we would have to agree with those in the negative-USD camp.
Fears that the recession in the US manufacturing sector were spreading to services and some dovish comments from Fed’s Dudley sent the dollar sharply lower on the 3rd of February.
However, it must be noted that price action in the fixed income market - the key driver of exchange rates - remains USD supportive.
"We cannot get away from the fact that instead of the bearish flattening of the US curve from the short end – which had been our key call to support the dollar – we are in fact seeing bullish flattening from the long end," says Chris Turner, Head of Strategy at ING Research.
Watch Friday's employment numbers from the US for further guidance where a low print could shift the Fed’s balance of risks outlook to the downside.
This could "potentially suck the US back into the global currency war. That is not our call yet – and the threat of more aggressive action from the ECB and the BoJ should limit the downside," says Turner.
