AFEX: British Pound Recovery Against US Dollar and Euro Forecast to be Limited

Associated Foreign Exchange (AFEX) expect the pressure on the pound sterling to ease in the near-term but believe ultimately further losses will occur.

Analysts at AFEX, the international payment providers, have said that It would not surprise to them to see, “at least a temporary cessation in (pound) selling pressure during the next few weeks, given how far and fast values have already eroded in 2016.”

The call comes as sterling mounts a rebound across the foreign exchange market place with the pound to euro exchange rate recovering to 1.2864 and the pound to dollar conversion seen higher just below the key 1.40 level.

Suggesting that the move could run for weeks opens up the possibility of further relief for those looking for a stronger pound.

However timing will be crucial and a good grasp of reality required as AFEX's head of risk management, Lucy Lillicrap, is quick to dispel any notion that the pound is about to reverse and start a longer-term trend higher again arguing rebounds will remain short-lived.

Interestingly, AFEX's analysis of the Pound Index suggests the strength we have seen over recent years is in fact a corrective move within a multi-year decline; the 2016 move lower we are witnessing is therefore a resumption of the multi-year secular down-trend.

The Pound Index is a basket of GBP pairs, all weighted differently according to their importance. The index cuts out the noise that any specific pair might deliver and gives us an idea of how the currency is doing from a broader perspective.

Latest Pound/Euro Exchange Rates

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"Taking the Sterling Index for example, although some buying interest may well emerge at 84.00 or 82.50 areas, the entire rebound from 73.50 (in 2009) to 95.00 (last year) is seen as corrective and complete," says Lucy Lillicrap at AFEX.

In short, the bull-run that those waiting for a stronger GBP in the 2014-2015 period could always rely on is now done.

Lillicrap argues that GBP/USD, "remains under significant pressure," and that although 1.4000 has historically provided good support, "values appear to be breaking lower again and unless this level is both regained and held over coming sessions it is difficult to envisage even an interim low forming before another examination of 1.3500 (early 2009 bottom) is witnessed."

Whilst they also hold that the current down-move has reached oversold extremes:

"Sterling prices remain vulnerable on the downside in coming sessions with no obvious bottom implied.”

They see little support in the 1.30s, to prevent a slide lower:

"Some support exists at 1.3700 but the market could conceivably stair-case its way toward 1.3550 thereafter before stronger demand is uncovered."

As far as upside goes, scope is capped in the early 1.40s:

"Resistance around 1.4100 then 1.4250 zones and rally scope appears limited thereafter in the absence of a confirmed low."

GBP/EUR Outlook

The pound to euro pair is in an established down-trend which is expected to extend to at least 1.2500.

“Some support should emerge on approach to 1.2500 but any rebounds from this psychological point will be viewed as corrective and 1.2250 or so now looks to be achievable as well going forward,” says Lillicrap.

A change of outlook would require a break above the key 1.3000 handle:

“Interim rally attempts face little meaningful resistance until 1.2800 again initially though only beyond the distant 1.3000 level as well is overtly positive.”

EUR/USD Outlook: This is Just a Sideways Move

The euro to dollar exchange rate is under fresh pressure in early March and markets are increasing their bets against the shared currency.

AFEX remind us the pair is still well within the boundaries of a long-term sideways move:

"Recent EUR weakness looks to be another component of an ongoing/incomplete triangular re-consolidation pattern and thus for now at least directional bias remains effectively neutral as prices continue to pivot 1.1000 or so in effect."

For AFEX 1.1400 remains a line-in-the-sand which until breached keeps the threat of bears still alive:

"An eventual downside resolution is still readable while this remains below 1.1400 but no direct route yet exists back to 1.0465."

Strong US Data Prompts Dollar Gains, More Could Lie Ahead

The market has largely ignored the outcome of the US Super-Tuesday primaries opting to focus on stronger US data.

Positive US data surprises yesterday in the form of the ISM manufacturing survey and construction spending supported risk sentiment

As we note here, there are analysts warning the US dollar could be about to make a large move higher as conditions align for a continuation of the now paused multi-year USD rally.

“It is rare to see a market effectively flat a currency at a time when the underlying economy is finally showing clear signs of closing its under-utilised resources gap. For the first time in many months the USD looks well positioned to mount a serious attack at the key 100 resistance level,” says Richard Franulovich of Westpac on the US Dollar Index.

Deutsche Bank’s Alan Ruskin says he believes that even a maturing USD trend could extend for another couple of years, albeit at a much slower pace.

“The USD real broad TWI is within 5% of fully recouping its prior cycle losses, but will achieve much stronger levels than the prior cycle peak, if China’s currency depreciation accelerates even modestly,” says Ruskin.