GBP/USD Rate on a Tear Higher - But Pessimism is in Generous Supply
- Written by: Gary Howes
Are we witnessing a genuine recovery in the GBP to USD conversion or is the UK currency just setting itself up for the next leg lower?
The GBP/USD surged by over a percent in the opening day of February to register its best levels since mid-January at 1.4434.
The move higher comes on the back of widespread USD selling spaker by disappointing negative manufacturing data out of the United States.
The ISM manufacturing index nudged up to 48.2 in January (previous: 48.0), posting a softer rise than the consensus (48.4) had expected.
"Treport is consistent with our outlook for tepid activity and employment growth in the US manufacturing sector this year. The continued appreciation of the trade-weighted dollar is hurting US manufacturers’ competitiveness in many foreign markets, where demand continues to deteriorate. We expect this trend to continue in the near term," says Jesse Hurwitz at Barclays in New York.
The data confirms the economic profile of the U.S is slowing and this will likely see the U.S Federal Reserve hold back on raising interest rates as agressively as markets had been expecting. The dollar must therefore fall in order to price in this new reality.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3347▲ + 0.16%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2893 - 1.2947 |
**Independent Specialist | 1.316 - 1.3214 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Bigger Picture: Forecasts for the British Pound v Dollar
From a near-term point of view the exchange rate is still oscillating higher within a corrective pattern, which resembles a rising wedge.
The wedge looks almost finished having completed the standard minimum of five internal waves.
The exchange rate has now reached the S2 Monthly Pivot providing substantial resistance at around the 1.4390 mark.
Can it break higher? If it moves clearly above S2 and the upper border of the rising wedge then it could signal the pair has broken clearly out of the pattern and will move radically higher.
Such a move would be confirmed by a break above the 1.4450 level and a target at 1.4570 where the S1 Monthly Pivot is situated.
Beware a Return to the Longer-Term Trend Lower
A break lower remains a strong possibility given the longer-term trend down.
Such a move might gain confirmation from a break below the D wave lows at 1.4229, with a target at the 61.8% Fibonacci extension of the height of the wedge at its widest point extrapolated down from the break, giving a target at the 1.4079 lows.
Both the Chaikin Money Flow Index and Volume are falling gradually, highlighting some underlying weakness in the pattern, which supports the probability of a down-side break.
According to Karen Jones, technical strategist at Commerzbank, 1.4151 will need to be watched closely since a slip through it would put the January low at 1.4083 back in the frame.
Jones is biased to the downside.
"Below it lies the minor psychological 1.4000 region. The 1.3502 January 2009 low remains our primary target medium term but first we still expect a minor bounce to be seen. Only a reversal higher and close above last week’s high at 1.4411 would put Fibonacci resistance at 1.4492 ahead of the 1.4568 April 2015 low on the map. From there the downtrend could then resume," says Jones.
Tanmay Purohit - a technical analyst with Societe Generale - warns that any strength in the GBP to USD conversion should be viewed in the context of a longer-term move lower.
Writing to Soc Gen’s clients on Monday Purohit says:
“After confirming a H&S, GBP/USD breached below the upward channel in force since 2009 (1.46) and looks to extend the down move towards 2009 lows of 1.36. Monthly RSI is cutting below a multiyear trend suggesting continuation in phase of correction. Short term upside, if any, is likely to be confined to 1.46.”
