GBP/USD Rate Under Pressure, but Chances of a Rebound Remain Alive
GBP trades softer at 1.2141 against the USD at the start of the new week but we remain confident that further consolidation is possible over coming days.
GBP/USD has fallen below 1.2150 but appears to have found some buying interest at these levels.
Reports that the Chancellor Phillip Hammond is battling fellow cabinet ministers who want to see notable curbs to immigration have kepts the currency subdued.
There have been further warnings that the loss of its ‘EU passport’ could cause a banking exodus from London next year, are the kind of items that would have caused a the currency’s wounds to open up last week.
The Pound has not made fresh lows against the US Dollar or Euro in over a week, "suggesting that pound may be due for a small short covering rally as the vast majority of selling may done for now," says Boris Schlossberg at BK Asset Management.
GBP/USD has carved out a wide 1.2000 1.2500 range in the aftermath of the flash crash and could begin to inch towards the upper end of that region as the week proceeds.
From a fundamental perspective, the Dollar appears to have all the suit cards now that rate hike expectations for December are almost certain.
Governor of the Fed Janet Yellen’s speech on Friday, October 14, suggested as much after she said being accommodative for too long might have its costs.
The Fed’s Rosengren added fuel to the fire by saying that market expectations for a December rate hike were “about right”.
He added in an interview on Saturday 15th that he believes the US was close to overshooting his estimate of full employment and as a result the market was hot.
US bond yields are rising as a result of expectations for rate rises while UK bond yields are headed in the opposite direction as the Bank of England expands its quantitative easing programme - this divergence in yields can broadly explain much of GBP/USD's recent decline.
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.
Worst Case Hard-Brexit Scenario Accounted for by Sterling?
The Pound remains vulnerable to Brexit uncertainty, although, some analysts suggest a worst case ‘Hard Brexit’ scenario has now been priced in.
With parliament trying to grab more powers from the executive over the nature of Brexit, the risks for the Pound may actually be tilted to the upside on the suggestion that Parliament would most likely approve an agreement that is centred on accessing the single market.
After having spiked lower to the 1.14s this October GBP/USD has since rebounded back up to above the 1.20 level.
The big question is now whether the pair is likely to move lower or rebound.
From a technical perspective, we are sticking to our forecast that the pair will make a recovery from the current level.
The forecast is based on the strong reversal potential of the very long hammer candlestick which formed during the spike lower.
A move above 1.2500 would provide confirmation of a continuation higher to an initial target at 1.2690.
At that level, it would hit a tough resistance barrier in the shape of the S3 monthly pivot, a level used by traders to open order against the prevailing trade, in anticipation of a pullback or bounce.
The exchange rate rarely moves outside of S3 and the fact that it has on the recent spike lower is a sign it is extremely overextended and adds further weight to our bullish hypothesis.
Commerzbank’s Axel Rudolph also sees potential for a rebound given the pair has made three inside days in a row – usually a reversal sign in itself.
Rudolph, however, sees a “small recovery rally” coming from a break above the 1.2279 October 13 inside day high.
This would then in turn probably lead to a move up to 1.2500.
A break below the 1.2090 level, however, would indicate more downside, initially to 1.2000.
Analysts Quek Ser Leang and Lee Sue Anne of Malay Bank UOB see the pair jammed between tough support at 1.2100, and resistance at 1.2270.
Hantec Market's analyst, Richard Perry, sees the pair now basically range bound between 1.2130 and 1.2330, and remains bearish under 1.2480.
Data to Watch from the UK
Tuesday sees the release of September CPI, which showed a 0.6% rise previously on a year-on-year basis.
Employment data dominates on Wednesday, with Unemployment Rate, Average Earnings, and Claimant Count.
Thursday sees the release of September Retail Sales.
Data to Watch from the US
Core CPI in September will be released on Tuesday and is expected to slow to 0.2% from 0.3%.
Any rise in CPI could intensify rate hike expectations and propel the dollar higher.
Wednesday sees the release of Building Permits in September, with a rise to 1.15m forecast from 1.52m previously.
Thursday sees the release of the Philadelphia Fed Manufacturing Index for October, with a 5.5 result expected, from 12.8 previously.
September Existing Home Sales are also released on Thursday, with 5.38m expected, from 5.33m previously.
