Pound Falling Against US Dollar, All Eyes Fixed on 1.40 Support Zone

The British pound has failed to capitalise on US dollar weakness and the pound to dollar conversion looks intent on questioning the honesty of the support zone that lies at 1.40.

The pound saw fierce selling pressure in mid-week trade come to an end as markets suddenly decided  that it was the dollar that should feel their wrath following the release of the minutes from the US Federal Reserve's last meeting.

For the dollar to have really kicked the pound into touch markets would have liked to have seen some indication that the Fed was looking to raise interest rates a couple of times in 2016.

"To the dismay of dollar bulls, the March FOMC minutes failed to rescue the dollar, causing the greenback to end the day lower against all of the major currencies. Apparently many policymakers are worried about low inflation and growth outside of the U.S. and the implications that it could have on the domestic economy," notes analyst Kathy Lien at BK Asset Management.

Whims have changed once more and on Thursday the pound is falling against the dollar again.

The all-important support level at 1.40 has come into view, this is sterling's best hope of avoiding further declines in the near-term.

"GBPUSD breaks below significant support near 1.4050 minutes into the NY open but recovers just as swiftly, suggesting the 1.4053 level (the January and March lows and also the neckline of a head and shoulders pattern) should now offer solid support over this month amidst the backdrop of a relatively benign Fed," say CitiFX in a briefing to clients.

That said, with the weight of the negative momentum we would not be surprised if this level also gave way without a second thought.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3347▲ + 0.15% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2893 - 1.2946
**Independent Specialist	1.316 - 1.3213 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

How Low Can the Pound Go?

We doubt the frantic pace of the selling pressures can continue unanswered.

Sooner or later a recovery, or at least some consolidation, will occur. The question is, where?

Head of Technical Analysis at Societe Generale, Stéphanie Aymes says the 1.30’s lie ahead:

“GBP/USD has breached a multiyear upward channel support (1.46) and looks headed towards graphical levels at 1.36/1.35 (lows of 1986, 2001, 2009). Long dated indicators are close hitting a floor pointing towards possibility of consolidation once these levels are achieved.“

Citi argue it would take a weekly close below 1.40 to confirm a break and the head and shoulders would then target 1.36 with interim support seen at 1.3836, the trend low from February.

So while the pound could dip below the 1.40 point against the US dollar we should be patient and see how the exchange rate ends the week before drawing any judgements.

Risk Sentiment is Key to FX

For the pound and its other G10 currency colleagues risk sentiment matters arguably more than anything at present.

It's been a topsy turvy week with heavy declines on Tuesday burning the commodity currencies while the opposite was true on Wednesday when a surge in oil prices prompted a recovery.

For anything that is sold, something must be bought, so we are left with a binary world of winners and losers.

Of course this view may be a little too simplistic as, in life, there are always bigger winners and bigger losers.

There is therefore a 'hierarchy of risk' in the foreign exchange markets with the pound sterling sitting below the yen, Swiss franc, US dollar and euro which are deemed to be the 'safe' winners when stock and commodity markets are being sold.

“Sterling fell toward a one-week low amid a broad pullback in risk appetite. The pound has become increasingly vulnerable to fluctuations in investor risk appetite,” note Commonwealth Foreign Exchange in a briefing to clients.

The British pound does however sit above the commodity currencies such as the rand, Australian, New Zealand and Canadian dollars.

This helps us understand why the British pound fared as it did in the heat of the sell-off in early afternoon London time:

With risk aversion at elevated levels currencies that are deemed safer, i.e at the top end of the spectrum were seen benefiting.

Hence the pound fell down against the euro, US dollar and yen while advancing against the Aussie and South African rand.