For Both GBP/USD & GBP/EUR More Upside is Required Before we Call this a Recovery
The British Pound is looking more constructive against both the Euro and US Dollar but we are cautioned that it is too early to call a recovery.
Sterling has risen off its October lows with signs of stability starting to emerge across the exchange rate complex.
The question many who are watching Sterling will now be asking is whether they sit and wait for even better exchange rates or transact now ahead of a renewed decline?
We have heard from Societe Generale that the Pound has indeed found a new equilibrium and that dips should be short-lived; and others agree.
Analyst Bill McNamara at broker Charles Stanley has told clients that he believes a “base” could be forming in the Pound-Dollar rate.
“The overall impression is that, despite the volatility that has been evident over the last few weeks, that sterling might be building a base above the psychologically important $1.20 level – although we are almost certainly going to need to see a bit more upside before the many shorts out there feel the need to cover their trades,” reflected McNamara.
By “a bit more upside” he means a move above 1.2500 for confirmation.
Analysts at Associated Foreign Exchange (AFEX), on the other hand, are of the opposite opinion, that there has been a marked absence of “basing work” done so far.
Still holding a bearish forecast, they remark that:
“If prices manage to penetrate 1.2275/85 localized resistance, an extension nearer 1.2400 or even 1.2525 areas might unfold but even if seen, the absence of basing work suggests gains will be relatively short-lived.”
Nevertheless, our view is that basing work or no basing work, we see the flash crash lows as probably an exhaustion bar and therefore indicative of a bottom.
The triangle’s position as the previous move before the spike lower is also consistent with its frequent placement as the penultimate move in a trend.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.334▲ + 0.1%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2887 - 1.294 |
**Independent Specialist | 1.3153 - 1.3207 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
British Pound to Euro Forecast
The pound’s recent recovery is more as a result of euro weakness on fears the European Central Bank will start its printing presses again, than pound strength according to Charles Stanley’s McNamara.
The analysts would need to see a move above the 1.14 level for confidence the exchange rate was forming a bottom, however.
AFEX see a downside bias existing with a break below 1.1075 leading a continuation down to 1.0925, followed by extended losses all the way down to 1.0750 and 1.0500.
Substantial resistance in the 1.1300 -1.1450 region is likely to impede further upside attempts.
Latest Pound/Euro Exchange Rates
 | Live: 1.1455▲ + 0.1%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1066 - 1.1111 |
**Independent Specialist | 1.1295 - 1.134 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
“Technical studies argue resistance beginning at 1.1300 then 1.1450 areas will impede fresh recovery attempts and without an obvious basing structure rebounds here, as elsewhere, should prove untenable.”
Our own view is cautiously bullish, based on the flash crash spike lower looking very much like an exhaustion bar at the end of a downtrend, as well as the likely completion of a three wave measured move (underlined in red) down, after which the market should end its down cycle and begin a recovery.
From a purely technical standpoint, the strong bearish candle and relatively weak rebound circled on the chart below shows bears have a distinct advantage, and a break below the new lows would definitely continue the trend down.
