GBP/USD Exchange Rate Melts but USD Strength is Main Culprit
Pound Sterling and the rest of the G10 complex are unable to resist the resurgent US Dollar as the prospect of a December rate rise becomes more assured.
The USD is the stand-out performer in global FX at present and much of the GBP/USD's current decline can actually be attributed to Dollar strength moreso than Sterling weakness.
All G10 currencies are seen as being weaker against USD on Tuesday as diminishing political uncertainty is leading to greater monetary policy certainty.
The probability of a Fed hike by year-end hit a new four-month high of 75% as the probability of a Trump presidency is at a new low of just 17% (35% in late September) after House Speaker Ryan said he would no longer defend Trump.
The net result is that Sterling's 'Great October Selloff' against the Dollar extends into another day with GBP falling below 1.23 against the US Dollar.
Short-term sentiment around GBP is likely to remain bearish and the market has been given fresh potential downside targets to aim for courtesy of Friday the 7th's flash-crash.
Bloomberg’s median low was set at 1.1841 while Reuters traded low is set at 1.1491.
This is important to note as a precedent has been set by the crash and technical traders now have a target that is both relevant and timely to aim for.
“The near-term picture still looks bleak: in a low conviction market, hard-Brexit and the low UK interest rate environment means GBP will remain the go-to short in the G10 space,” says ING's Strategist, Viraj Patel.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3323▼ -0.02%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.287 - 1.2924 |
**Independent Specialist | 1.3137 - 1.319 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Exhausted
Nevertheless, we observe technical patterns on the GBP/USD chart which indicate the possibility that the bear-trend is becoming increasingly exhausted.
“While we suspect the sell-off is overdone, until the dust settles, the Pound is likely to remain especially susceptible to bouts of volatility,” says Adam Chester, Head of Economics, Commercial Banking at Lloyds Bank.
Ahead of the recent sell-off we observed the pair had formed a right-angled triangle or simply a consolidation before breaking out to the downside.
The breakout has transpired.
The triangle’s minimum price target, calculated by extrapolating the height of the triangle down, was at 1.2500, and this has been surpassed.
Triangles are often the penultimate ‘wave’ or formation within a trend.
This would indicate the final spike lower may be the last move in the broader downtrend, and a reversal is imminent.
Price action has formed a ‘Hammer’ Japanese candlestick pattern (circled below) with a long ‘wick’ or ‘tail’.
The candle has printed below the lower Bollinger Band, the light blue, shaded region around price, which increases the possibility it could be signaling the down-trend has reached an exhaustion point and therefore could be at risk of a reversal.
The Bollinger Band is an envelope around prices, calculated by taking the 20-period simple moving average and then marking two lines, one above and other below which sit at 2-standard deviations from the mean.
Theoretically, prices move within the bands for 95% of the time.
This means that when they stray outside there is a high probability that they will revert to the mean – or in layman’s terms move back inside towards the central area.
When a move outside the bands happens in conjunction with a long-tail hammer it increases the odds prices will move back inside the bands or even reverse trend.
These set-ups have a high probability success rate of reversal and a move above 1.2500 would likely lead to a rebound to 1.2900.
However, betting on a recovery remains risky and we stress that what we are simply trying to do is remind readers currency markets don't always move in one direction and they must be open to the idea that Sterling could bounce.
A Strong Dollar Lead by Data
As mentioned, it is not all about GBP weakness when it comes to propogating the current GBP/USD decline.
The Dollar remains heavily dependent on whether or not the Federal Reserve choose to increase interest rates in December.
Friday’s Non-Farm Payrolls – although marginally lower-than-expected - kept the door open to the Fed raising rates before the end of the year.
US data have begun to surprise on the upside, helping the USD recover from its post-FOMC lows.
Rates markets have moved to price in 62% chance of an FOMC rate hike by December.
CIBC Economics’ Royce Mendes, said the rise in Friday's payrolls was more than what was needed to “outstrip population growth” and keep Fed hike expectations moving in a USD-friendly direction:
“It might not have lived up to the rebound markets were hoping for, but the employment report in the US still showed solid progress.
“In addition to another payroll gain that outstrips what’s needed to cover population growth, other details in the report also showed strength in September.
“Following a soft spot for economic data in August, the limited indicators released thus far for September have been largely positive, keeping the door open for a rate hike later this year.”
The overall advantage, purely as a result of fundamentals, therefore, appears to be in favour of Dollar strength over the Pound in the coming five days.
Data to Watch for the Dollar
A quiet week for the dollar sees the first main release on Wednesday, with the Federal Open Market Committee (FOMC) meeting minutes.
According to commentary from broker TD Securities, “on the back of the upbeat tone of recent data, we expect the minutes to reinforce the near-term hawkish stance of the September meeting with the overwhelming majority laying out the arguments for taking the next step in normalization.”
A speech by Fed Chairwomen Janet Yellen on the same day is also likely to reflect a desire for higher interest rates, in line with recent commentary.
Then on Friday we see the release of Core Retail Sales in September, which is forecast to rise 0.4% from -0.1% in the previous month.
Retail Sales is expected to show a 0.3% increase from -0.3% in August.
“We look for a solid pickup in retail sales with upside risk, supporting robust Q3 real PCE growth,” comment TD securities in their data preview.
Factory Gate prices are also out on Friday with analysts estimating a 0.3% rise in September.
Events for the Pound
There is no hard data with the ability to move Sterling due for release this week and therefore news headlines pertaining to Brexit will remain the big driver.
However, there is some central bank risk on tap.
On Friday, October 14, the Bank of England host an event which could impact on the outlook for monetary policy and therefore the pound.
The “Future Forum” sees all the members of the MPC speak.
The subject of the Forum is "How can the Bank service society and maintain stability in times of change?" which doesn't sound like a policy-heavy day, but with microphones in front of the Governors and no MPC meeting this month, there will be ample opportunity to provide views.
Nevertheless, for Sterling sentiment will remain key and unless there is some eye-opening remark from Carney and his team we would expect political headlines to be in command.
