Sharp Upside Turn' Possible for GBP/USD Rate, But Strength Forecast to be Short-Lived

Strategists will likely view any recovery in the GBP to USD conversion as an invitation to extend their bets against the British pound.

The British pound has shed over three percent and fallen to a new seven-year low against the dollar this week.

The GBP/USD has bounced thanks, in part, to a solid set of UK GDP numbers that serves to remind foreign exchange markets that there is a world beyond Brexit.

Sentiment for sterling still remains weak, however the frenzied selling that we had seen earlier in the week appears to have run its course, at least in the short-term.

We have heard a number of analysts warn that a short-term correction could be in the air.

"Near-term we are in a consolidation phase, with 1.40 and then 1.4140 the main resistance levels we are watching," says Robin Wilkin, analyst at Lloyds Bank.

Wilkin says a move up through these levels would alleviate some of the bear pressure on sterling, especially as the currency is so far out-of-line with the rates market, with 1.43/1.44 main resistance above.

Month end flow may well start to feed in today, which may increase volatility.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3354▲ + 0.21% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.29 - 1.2953
**Independent Specialist	1.3167 - 1.322 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

"Severely oversold conditions coupled with early signs of momentum slowing down suggests low odds of extension lower to the next support at 1.3800," says Lee Sue Ann at UOB in Singapore.

“GBP remains bearish against USD on extended sell-off on Brexit concerns, but we caution that direction could take a sharp upside turn,” says a note from Hong Leong Bank, “technically, GBPUSD continues  to take aim at 1.3900 but amid signs that downside bias is ebbing, losses are likely to moderate.”

Karen Jones, technical analyst at Commerzbank says near-term she is alert to a corrective rebound even as the GBP to USD conversion remains on target for the 1.3502 low.

There is a sense that the oversold conditions have been created by an effective scare campaign by the In camp, particularly with an overblown narrative on economic risks.

"We think that estimates published by various commentators recently suggesting a big negative short-term hit to the economy from Brexit are overdone. Admittedly, the net impact would probably be negative. But we think that growth would be only a bit lower this year and next than would otherwise have been the case," says Victoria Redwood at Capital Economics. 

Redwood says there now appears to be scope for a significant rebound if the UK were to vote to stay in the EU. In the event of a “remain” vote, we think that sterling could rise from $1.39 to around $1.50 against the dollar.

Better Levels to Sell From

Nevertheless, Jones and many other strategists like her, will be looking at any spikes in the British pound as reason to enter fresh bets against the currency.

“Our short sterling versus US dollar high conviction view has been our top-performing trade this year. We expect GBP/USD to move towards 1.35 ahead of the referendum,” says Roy Teo, Senior FX Strategist at ABN Amro.

ABN Amro have been negative on sterling versus the US dollar since November 2015 because of a delay in BoE rate hikes, a weaker economy and fears about Brexit ahead of the referendum.

They have however since upgraded their GBP/USD forecast from 1.25 to 1.35 on observations that the US dollar is likely to underperform in 2016.

Bears Will Return as Long-Term Downtrend Remains Intact

"It is hard to believe with the cloud of negativity that the Brexit uncertainty has created, that we will not be seeing a return of the GBP/USD bears soon enough," says Alastair McCaig, Market Analyst at IG.

Citibank’s technical team are placing their destination for the next big move in the pound to dollar exchange rate towards 1.35 noting price action in GBP/USD remains bearish and the longer term chart suggests that a (weekly) close below 1.4080 (January low) would target a move to 1.3954.

Beyond that, support levels are seen at 1.3657-82 and then 1.3503 which was the January 2009 low.

“Note that the unit is trading in a very similar fashion to the 1990’s that points to an eventual move to the 1.35-1.36 area (if not in the short term then the medium term),” say Citi.

Wilkin at Lloyds reminds us, "the trend from 1.60 remains very much intact, but as highlighted yesterday we are now into a major area of historical support between 1.40 and 1.35.

The lower level being set in 2009.

"This area has been supporting the market since the mid-1980’s, so a clear break would obviously be worrying, with the next important support below lying around 1.28," says Wilkin.