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Tough Resistance Halts Sterling's Run Higher against the Dollar

Foreign exchange trader

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- GBP/USD weakens after touching technical resistance

- Risk of more downside as Dollar still popular

- USD is place to be says HSBC’s Bloom

The Pound-to-Dollar exchange rate’s recovery could be in danger of fading after the pair ran into major chart resistance over the course of the past 24 hours.

Having advanced 1.26% over the course of the past week, resistance in the market has “taken the sting out of the current bull run,” say analysts at Thomson Reuters, and threatens to be the start of a deeper unwinding.

GBP/USD reversed its downtrend at the September 03 1.1958 lows and then started rising. It then peaked at 1.2354 on September 5 before pulling back down to 1.2299 at the time of writing.

Daily GBPUSD graph

The pull-back calls time on the previous uptrend and although it should be “viewed as corrective” there is a risk “the drift away from resistance could build in significance,” warns Peter Stoneham, an options analyst at Thomson Reuters.

Resistance comes in the form of a cluster of major technical levels including the 50-day moving average (MA), the 55-day MA, and the bottom of the Ichimoku Cloud- a level used by practitioners of Japanese cloud chart analysis.

These levels are usually associated with causing resistance on charts - which means they present obstacles to the trend. Knowing this short-term technical sellers often enter bearish bets at around the same level hoping to take advantage of the expected pull-back. Sometimes they are the location of wholesale reversals of trend.

Stoneham says one of the things which continues to give him faith in the uptrend is the the bullish hammer candlestick pattern which formed at the September 3 lows and gave the initial upside signal.

However, a bearish close on a weekly basis, which may be highly dependent on activity today after the release of U.S. non-farm payrolls at 13.30 BST, could be a deciding factor in whether the fragile recovery survives.

The next key support level to the downside is at 1.2212.

Sterling has recovered after parliament successfully voted to block a ‘no-deal’ Brexit.

Yet a snap general election is still a major risk for the currency and remains most strategist’s base case scenario.

A general election would be something of a ‘lose-lose’ event for the Pound, say Petr Krpata, a strategist at ING.

The Pound would weaken if the conservative party won a majority or if it formed a coalition with the Brexit party since both these would put a ‘no-deal’ Brexit back on the table. Given the Conservative party have the largest majority in polls there is a good chance of this happening.

Sterling would also probably weaken if the Labour party won, probably because it would need a coalition with the SNP party to get a majority, making Scottish independence more likely, and because of Corbyn’s far left economic policies are seen as anti-business.

The U.S. Dollar, meanwhile, remains relatively strong due to the resilience of the economy and the weakness of its peers.

Whilst the Dollar did weaken after the ISM Manufacturing PMI fell below 50, which is the dividing line between contraction and growth, analysts remains relatively upbeat about the currency.

The place to be at the moment is “the beautiful Dollar,” says David Bloom, chief FX strategist for HSBC. “Come on, you know you love them, those ‘green ones’. It still gives you the highest yield over 1 year, it is still the risk currency, it is still the lifeblood of currency markets. You certainly don’t want the Euro. The Dollar is still the place to be. Why do you want to mess around with Sterling,” said Bloom in a recent interview with Bloomberg News.

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