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A Pound-to-Dollar Rate Breakout to the Upside is in Sight but Market is Rested on Key Trendline says Rabobank 

© Pavel Ignatov, Adobe Stock

- GBP rested on upward-sloping trendline, key to outlook says Rabobank. 

- GBP approaching an inflection point, where it will break higher or lower.

- Politics the trigger but use technicals to identify targets says Rabobank.

The Pound-to-Dollar rate is trading close to a trendline that is key to the technical outlook, according to analysts at Rabobank, who say the odds are skewed in favour of  rally higher for the exchange rate over the coming weeks but warn of losses to come if the trendline gives way. 

Pound Sterling is up 2.8% against the U.S. Dollar thus far in 2019 but it's been higher in recent weeks. Monday the exchange rate was trading around 1.3100, which is just 50 points above a level that has Rubicon-like significance to the outlook for the pair over the coming weeks. 

"Essentially, developments in UK politics will set the tone for GBP/USD and are likely to prove a decisive factor in determining whether the pair resumes its upside trend or a sharp reversal unfolds in the coming weeks with technical analysis providing potential targets," says Piotr Matys, a strategist at Rabobank. 

Since mid-March the Pound-to-Dollar rate has pulled back from 2019 highs that had once seen it trade with a gain of more than 5% over the Dollar for the year-to-date, but failure by Prime Minister Theresa May to pass her EU withdrawal plan through the House of Commons has since seen the rally come undone. 

Now, the UK faces a months-long extension to the Article 50 negotiating window that will see the country participate in elections for the next EU parliament nearly three years after having voted to depart from the bloc. 

Whether or not the UK even leaves the EU, as well as the much reduced but ever moving odds of a so-called no deal Brexit, will both be important factors in the trajectory of the Pound-to-Dollar rate over the coming months. 

"Support area around the psychological level of 1.30 is also crucial to watch," Matys writes, in a recent note to clients. "While it was pierced on a few occasions since early March on an intraday basis, GBP/USD has not closed below the 1.30 threshold since early February. Therefore, a break lower would be a strong bearish signal."

Above: Rabobank technical analysis of Pound-to-Dollar rate. 

"Gains have been capped by the trendline resistance - from the March high - currently at 1.3135. A break higher - confirmed by a close above the 1.32 pivot - would be a constructive signal for the GBP bulls who may aim at the March top at 1.3381," Matys adds. 

PM May is now in negotiations with the opposition in an attempt to develop a joint plan for the UK's exit from the EU, after the House of Commons rejected her withdrawal agreement on three occasions and then failed to find a majority in favour of any one path forward. 

Both major parties are seeking to make changes to the political declaration setting out ambitions for the future relationship, as the EU has insisted it will not renegotiate the withdrawal agreement or contemplate changes to the so-called Northern Irish backstop inside it.

"Given that the upside trend is still intact at this stage, the odds are skewed in favour of GBP/USD breaking higher. UK MPs finally getting their act together during the extended period of leaving the EU and solving the worst political crisis in the UK in decades would be a strong bullish catalyst for GBP/USD. That said, we are far from being complacent about growing political risk," says Matys.

It's far from guaranteed the two major parties will be able to reach a Brexit agreement and even if they do, the governing Conservative Party will be riding roughshod over its confidence and supply partner, the Democratic Unionist Party, which means any deal may ultimately be greeted by a DUP attempt to bring down the government. 

That could give way to a general election and market fears of a Labour Party government under current leader Jeremy Corbyn, whose marxism and economic policies are a long way from being 'market friendly'. It could also improve the odds of a pro-Brexit Prime Minister, given PM May's pledge not to lead the Conservatives into another vote.

"When putting all of those crucial trendlines and support areas together, it becomes clear that GBP/USD is approaching an inflection points," says Matys. 

Above: Rabobank technical analysis of Pound-to-Dollar rate. 

Pound Sterling was trading comfortably above the 1.31 handle Monday but whether it recovers more of its post-referendum loss or hurtles down toward new lows over the next few months will be determined by the ebb and flow of Brexit headlines emerging from Westminster. 

Those matter to the currency market because the UK's exact path out of the European Union could be difference between the Bank of England (BoE) cutting its interest rate this year, and lifting it. The BoE has suggested repeatedly that it won't risk clobbering the economy with higher rates if a so-called no deal Brexit looks likely at any point.

However, the BoE also says rates must rise in order to safeguard its inflation target from a challenge by the consumer price index. That's still close to the BoE's 2% target, wages are growing at a decade high and the economy has been resilient of late even in the face of the Brexit farce in parliament.

Economists now forecast a pick-up in growth for the first-quarter but two extensions of the Article 50 window have now undermined the outlook for Pound Sterling because, even if inadvertently, they've kept the spectre of a no deal Brexit on the table and that's preventing the Bank of England from hiking rates. 

The overnight-index-swap-implied Bank Rate for December 19, 2019 was just 0.74% on Monday, beneath the current 0.75%, suggesting markets currently see no chance of a BoE rate hike in 2019. Anything that moves that implied rate higher would be almost sure to lift the Pound. 

Above: Pound-to-Dollar rate shown at daily intervals.

 

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