GBP/USD: That GBP/USD Recovery Remains Valid as Long as 1.51 Holds
The British pound tends to rally strongly after 8 consecutive down days against the US dollar and markets bought the GBP in anticipation of a new leg higher.
After rallying on Friday the 2nd of October the pound to dollar exchange rate (GBPUSD) has since reversed direction and looks intent on testing the 1.51 support zone.
However, as long as this support zone holds the prospect of a resumption of the recovery higher remains alive; the next two days will be crucial for this pair and those analysts that have tipped their clients on a move higher in the exchange rate.
CitiFX told their clients they see the move higher from support potentially extending to 1.56.
Indeed, moves either way in sterling / dollar to tend to last for decent periods and the rebound could therefore still be young.
Latest Pound / US Dollar Exchange Rates
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"Within G10, GBP is likely to benefit from a decline in the dollar. We also see a similar technical pattern eveloping in the daily chart whereby GBP/USD tends to recover strongly after 8 consecutive down days, as seen from the 25-Aug to 4-Sept decline which subsequently led to a 490 pip rally. In the current context, the 9-day decline has ended on 30-Sept, thus we are inclined to position for higher GBP/USD via leveraged zero-cost risk reversals," says Peter Chia at UOB Group.
Lucy Lillicrap at AFEX meanwhile sees scope for a sustained break lower in the longer-term:
"Whilst some support is emerging toward the psychological 1.5000 level recent GBP price action here is starting to look top- forming with a downside resolution from the past few weeks range considered increasingly likely going forwards."
However, Lillicrap cautions that given that the previous April-June rebound appears corrective itself Sterling weakness may well continue during Q4 as sufficient compression already exists to breach 1.5000 and target support in 1.4800 area.
"A break of the latter would then target this year’s low at 1.4550 next. To reduce downside risk values must reasonably swiftly rally back above at least 1.5650 instead," says Lillicrap.
The British Pound Hurt by PMI Data, Political Risk
Sterling is under pressure against most majors - "sterling’s rough patch continues as the post-payrolls dovish Fed re-pricing has negatively spilled over into BoE rate hike expectations," says Chris Turner at ING in London.
The GBP has been hit by fresh indications that the UK economy is slowing down somewhat. The Markit / CIPS Services PMI reading for September read at 53.3, down from 55.6 in the previous month. Analysts had forecast the index to rise to 56.0. This clearly represents a big miss for currency traders who had priced the GBP to EUR exchange rate for a better figure.
Turner says the recent wave of GBP selling has been driven by the widening gap between the expected timing of the first Fed and BoE rate hike (ie, moves at the very short-end of the curve), rather than a material deterioration in the UK economic outlook.
ING believe political risk is also playing a role in keeping the British pound exchange rate complex under pressure; this week’s annual Conservative Party conference may hint at a potential date for the EU referendum.
The pound to dollar conversion advanced in the wake of the disappointing US non-farm payroll numbers which surprised on the downside. Data saw weak headline growth (+142k), the August revision came down 37k (versus average +40k August revision over the prior 15 years) and a flat MoM wage growth.
USD two year swap rates, which are important for short term dollar pricing, fell another 10bp to levels last seen in January. The USD swap curve continues to flatten as the market postpones Fed tightening and also prices lower growth/inflation.
