GBP/USD: "Only a Move Above 1.4450 Would Indicate Our Bearish View is Wrong"

A number of analysts have confirmed to us that the recent strenght in the GBP to USD conversion appears to be a corrective turn within a broader and more sustained move lower.

The British pound's February rally against the US dollar could be turning as we have witnessed the GBP/USD pair fail to establish itself above the important resistance level at 1.4535.

The inability to advance beyond this key level, combined with a sudden sell-off in the GBP/EUR rate, saw the pound suffer a sharp drop from the high of 1.4515. However we note that the rate has stabilised following some decent UK employment figures this morning.

At the time of writing the GBP/USD is at 1.4269 with bank transfers being quoted at around 1.3869-1.39 while international payment specialists are much tighter on their spreads and quoting between 1.40-1.4050.

Despite the employment-inspired gains those with an interest in the sterling/dollar market should be aware that recent price action suggests the exchange rate is coming under pressure once more.

"The down-move appears incomplete but oversold conditions suggest a limited and slower pace of decline," say United Overseas Bank in a foreign exchange strategy brief to clients; "fom here, allow for a bounce to 1.4335/40 but 1.4385 is expected to hold for a move lower to 1.4240 before a more sustained recovery can be expected."

U.O.B have maintained a neutral view for GBP since late January and viewed the rebound from the low of 1.4080 as a corrective recovery.

"The abrupt and sharp drop below the key 1.4350 support yesterday suggests that GBP has resumed its recent downtrend. The immediate target is for a move to 1.4200 with a reasonable high chance for a retest of the 1.4080 low," says U.O.B strategist Quek Ser Leang.

"Resistance is at 1.4385 but only a move above 1.4450 would indicate that our bearish view is wrong," says Ser Leang.

The immediate target for U.O.B is at 1.42, and by looking at the below chart we can see why: This is an area that coincides with significant support having arrested the agressive downtrend witnessed in December-January.

According to Gajan Mahadevan at Lloyds, much of the uncertainty around the 2016 EU referendum and interest rate expectations has already been priced into the British pound for now, thus providing a potential break to further significant downside.

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.

 

Nevertheless, Mahadevan is also targetting similar levels to the strategists at U.O.B:

“While below 1.4650, our bias is for a gradual move back towards the 1.4200 congestion region and potentially beyond to the key long-term support zone between 1.40 - 1.35.

“The nature of further moves to the downside is unlikely to be as aggressive as in the previous month, given that markets have already accounted for drastic changes to interest rate expectations and re-priced the risk around the EU Referendum.”

Swissquote Targetting 1.35

Looking at the longer-term picture analyst Yann Quelann from Swissquote Bank, in Gland Switzerland, warns that a descent into the 1.30's is possible:

"The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average).

"However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound."

An 'Impressive Rally' That Turned Out to be a Correction

No-one would have guessed that with the ‘sword of Brexit’ hanging over its head sterling could mount a recovery against the US dollar of over 500 points, but that is what happened after the pair bottomed in the latter half of January.

Much of the reason has been the realisation that the Federal Reserve is probably not now going to hike lending rates as much as it had promised.

Indeed, from expectations of a hike at the June meeting which were common-place at the start of the year, expectations have now been pushed back 26 months, according to a recent note from Bank of America.

Nevertheless, subsequent price action has confirmed the pair was undergoing a regular correction within the midst of any broad down-trend, with little volatility apparent in its rather flat daily bars.

However, given the extreme sea-change view of U.S interest rates, and the fact Brexit may have broadly been priced in, the pair could actually find downside will be limited.

US Dollar Rapidly 'Recalibrating' 

For the USD the central theme is about the Fed’s commitment to raise interest rates and we have seen part of the GBP/USD move higher come on the realisation that the Fed may have to scale back its previous expectations for four interest rate rises in 2016. 

“It is hard to understate how dramatically US expectations have recalibrated. Our US rates team highlights the implied timing of the next full hike now stands 26m out vs 33m at the peak of forward guidance and compared to only 5m out at the beginning of the year," says a note on the matter from Bank of America Merrill Lynch.

This change in opinion pulled the rug of yield support from under the dollar and has meant 2016 has been a poor one for those hoping for a stronger USD.

Nevertheless, not all is lost, BofA go onto say that fears the Fed might do a complete U-turn and start cutting rates again – as Fed Chair Janet Yellen suggested in her testimony to Senate – is not likely either:

“At the same time, the sharp flattening of the rates curve and depressed level of US inflation breakevens suggest the market still believes the hurdle for a policy reversal by the Fed (rate cuts and QE) remains high, consistent with the Fed's most recent communication that has acknowledged risks, but prefers to monitor than respond.”

So while the dollar has fallen lower, we could be seeing it settling at more comfortable levels which plays into our view that hefty sub 1.40 losses in GBP/USD are unlikely.