Carney Could Pull the British Pound Out of Malaise Against the Euro and US Dollar
The pound to dollar conversion is in the red again, but could an intervention by the Bank of England steady the ship today?
The GBP is looking softer on Tuesday as the hangover from Monday's sharp losses makes itself felt.
That said, the GBP to USD exchange rate remains above 1.41 and the GBP to EUR failed to close below 1.28 last night suggesting that losses are actually contained, for now at least.
Rather, it is against the commodity currencies where the majority of damage has been done with the Australian dollar looking particularly agressive thanks to an uptick in iron ore prices.
The question now is whether a relief bounce in the British pound can take place.
Observe that Mark Carney and several of his colleagues are to appear before the Treasury Select Committee to answer questions concerning their policy decisions and expectations for the future.
There is the real chance that markets can be shaken into focussing on the fundamentals again, which we see as being a positive.
"Following hawkish comments from MPC member Weale last week, it will be interesting to see if any of these indicate that they feel markets have become too complacent about the interest rate outlook," says a note from Lloyds Bank.
Pound Tests 7 Year Lows Against the Dollar
No doubt, the GBP is looking heavy and the bias is for further declines owing to the lack of clarity presented by the EU referendum in mid-year.
The pound to dollar exchange rate has tested a 7 year low having tapped 1.4750 on Monday, "1.40 next target, I would happily buy at that level," says Joel Kruger, FX Strategist at LMAX.
This is an important point made by Kruger, the market will be increasingly keen to bag a bargain, such buying could offer sterling a temporary reprieve over coming hours, and days.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3337▲ + 0.08%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2884 - 1.2937 |
**Independent Specialist | 1.315 - 1.3204 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
However, further out we should expect more of the same. "I think we are likely to see further sterling weakness ahead of the vote itself, as the debate rages and uncertainty undermines confidence," says Kit Juckes at Societe Generale.
Juckes says he can't imagine the opinion polls moving decisively enough in either direction for clarity to emerge before June 23.
"In the process, I expect to see GBP/USD break 1.40 and EUR/GBP break 0.80 between now and then - possibly both at the same time. On a ‘Brexit' I'd look for GBP/USD to trade to 1.30, at least," says Juckes.
Those that say the GBP move lower could be an over-reaction do have a point as the most recent polls have gone in favour of the In campaign. A telephone poll, conducted on Saturday by Survation, suggests the level of support to stay in the EU at 48%, to leave at 33% and undecided at 19%.
"To reduce this ongoing negative pressure technical studies suggest an extended re-basing exercise would be needed and in the meantime emergent GBP strength is viewed as corrective only. At best a breach of 1.4600, if seen, might allow 1.4800 first but strong resistance in any case awaits at 1.5000," says analyst Lucy Lillicrap at Associated Foreign Excahange.
Uncertainty is the Only Certainty
Citi Analysts argued recently that the probability the UK votes for Brexit is 20-30%, but they now increase their estimate of the probability of Brexit to 30-40%.
Markets are likely to become increasingly nervous on the issue.
The effects of Brexit, if it happens, are likely to be large and painful in economic and political terms, both for the UK and the overall EU.
It is worth pointing out that the euro suffered a hefty decline against the dollar as markets wake up to the fact that the European Union has a lot to lose on a UK exit.
Headline risk has now become the key driver of sterling, and indeed the euro, and we expect data to be ineffective in moving the UK currency.
"With both Michael Gove and Boris Johnson coming down on the Leave side of the debate, and almost half of the Conservative MPs, it is understandable that Sterling’s initial move has been lower. 'Uncertainty is the only certainty' where the economics of Brexit is concerned," says Sam Hill at RBC.
For sure, sterling should be higher if we consider recent data out of the UK has been unambiguously good and sterling would no doubt go higher were the cloud of Brexit to disappear.
HSBC are forecasting the GBP to USD conversion at 1.60 by the end of 2016 should Brexit be avoided.
Looking at the data due out this week we have to wait until Wednesday until we get any higher tier data, with BBA Mortgage data in January, and CBI Reported Sales in February.
Thursday, sees the release of GDP Q4 data (preliminary estimates) with previous Q3 results showing 0.5% growth quarter-on-quarter and 1.9% annualised. Apart from that Friday sees the release of Gfk Consumer Confidence.
Note that sterling remains in longer-term downtrends against the majors and we expect any strength in GBP to prove brief.
GBP to USD Forecast
The GBPUSD pair is consolidating just above the 1.4000 level and there is a sense that only a break below here would spell the start of a more sustained move lower.
The dominant trade remains down, and the pair will probably go lower, in line with this trend.
A break below the 1.4080 lows will probably lead to a move down to 1.4000, where support from the round-number effect at that level will probably break its fall.
A further fall below the S1 Monthly Pivot at 1.3946 – confirmed by a move below 1.3900, would probably lead to a further move lower, to the next major support level at the S2 pivot at 1.3650.
GBP to EUR Technical Forecast
The weekly chart actually shows limited down-side availability for GBPEUR, owing to the formidable support witnessed at 1.28.
The pair has reached substantial support from the 200-week MA and pulled back up.
It has also reached the minimum target calculated using the height of the pattern extrapolated below the neckline at roughly 1.2700.
Therefore, there is a possibility of further upside developing as the exchange rate bounces off this sturdy support cluster.
If, however, there is a deeper penetration below the 200-week MA and the 1.2500 level, that might provide confirmation for an extension down to 1.2310.
The daily chart shows the pair falling inside a descending channel.
It has reached support, however and is currently consolidating, in what might be a triangle formation.
If the triangle breaks lows and moves below the 1.2670 lows that would confirm more downside, however, the 200-week MA at 1.2635 would be expected to check down-side momentum and preventer a deeper penetration.
A break higher would not suffer the same restrictions, and so a move above 1.3052 would probably reach 1.3150, just below where the 50-day MA is situated, and likely to produce tough resistance.
