J P Morgan on the GBP/USD Exchange Rate: Bullish Short-Term, ‘Structurally’ Bearish Longer-Term

Analysts at J P Morgan anticipate a bounce in GBP/USD however the positive outlook for the USD longer-term suggests the bounce may not be enduring.

The Pound steadily recovered versus the Dollar last week, rising 1.5% intraweek, even though it eventually ended the week marginally unchanged.

Analyst Daniel P Hui of J P Morgan, believes further advances are possible, particularly if the current High Court challenge to the authority of the government to trigger Article 50 without recourse to parliament succeeds.

“GBP is likely to bounce if the court rules against the government, although this will almost certainly get passed to the Supreme Court,” says Hui.

Furthermore, the crowded bet against Sterling could prove beneficial to the currency in the short-term.

There remain near-record numbers of short trades on the Pound - these are trades betting on a fall in the Pound - which has led to an imbalance. 

Rebalancing in the market could provide another catalyst for a bounce, if a rapid recovery sees short-sellers close their bets the short squeeze could extend.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3336▲ + 0.07% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2883 - 1.2936
**Independent Specialist	1.3149 - 1.3203 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

For these two reasons Hui is short-term bullish GBP/USD, but, looking out over the longer-term his bullish view of the Dollar will probably overwhelm Sterling.

Hui’s bullish view longer-term it is predicated on a global shift from monetary policy as the principle driver of growth to fiscal policy as the principle driver.

Monetary policy is provided by the central bank by either cutting interest rates to reduce borrowing costs or non-standard measures such as printing money and quantitative easing.

A nation's 'Fiscal policy' comes directly from government spending and fiscal stimulus from increased investment by the government on public works or public spending in general.

Hui sees the shift as positive for the Dollar, potentially less positive for the Euro and Negative for the Yen as it will probably take the form of helicopter money in Japan.

We see the uplift from the unwinding of Trumpxit risk over the next three weeks as marginal since Trump’s protectionist agenda was arguably quite Dollar positive since it favoured exports over foreign imports, and would help to rebalance the trading account.

Fiscal stimulus, however, is likely to lift the Dollar, as it has done in Canada, and this is more likely under Clinton, so the increasing likelihood of her win, will also be a positive for the Dollar.

Technical Perspective

Chart analysts at J P Morgan still view the GBP/USD pair has likely to bounce up to 1.2595 or even 1.2839.

“We also see the start window for a stronger recovery in Cable to 1.2595 (daily trend) and to 1.2839 (minor 38.2 %) open as long as key-pivotal support at 1.2090 is defended,” says J P Morgan’s Thomas Anthonj.

Their outlook is informed by a form of cycle analysis called Elliot Wave theory.

According to Elliot Wave Theory, market moves are composed for five waves.

Waves 1, 3 and 5 are in the direction of the overarching trend, and 2 and 4 are corrective.

Anthonj views the flash crash lows as the end of wave 3 and the current rebound as an unfinished wave 4.

He still expects the pair to recover to 1.25s or 1.28s even during the current wave 4 correction.

It is only after that that the pair will probably start to resume the downtrend in the form of a wave 5.

This would be expected to reach at least as low as wave 3, but probably even lower still.

The view chimes with that held by Olivier Korber of Societe General, who sees much of the negative news around Brexit risks now baked into the price.

“Cable should settle at a new equilibrium. The discounted gloomy UK outlook both prevents a new bold depreciation and a much stronger currency.

“The technical picture suggests a new turbulent range between 1.21 and 1.28, with a real risk to see short-lived spikes in liquidity air pockets below 1.20.”

This bears an uncanny resemblance to J P Morgan’s call, Korber also highlights the risk of some short-covering pushing the Pound higher.

“Near-term, a moderate cable appreciation is likely as the market cleans extreme GBP shorts and adjusts the overshoot below interest rates,” he remarks.