Too Early to Bin the GBP/USD Exchange Rate's November Rally
Pound Sterling was forced into retreat by a renewed push by Dollar-bulls over recent hours - but don't doubt the GBP/USD potential to climb higher just yet.
The GBP/USD can still move higher we believe.
We wrote recently that we had adjusted our stance from being bearish to slightly bullish following the Pound’s rally at the start of this week.
We believe the call remains valid.
The Head and Shoulders reversal, topping pattern on the four-hour chart, which augured more downside failed after the strong move higher on Monday.
The exchange rate now looks like it is consolidating and forming what appears to be a bullish flag.
The expectation is for a continuation higher the same distance as the initial bounce.
A break above 1.2520 would confirm such a move, to a target at 1.2650.
With regards to the downside, a break below the trendline and the 1.2302 lows is also plausible and would lead to a probable sell-off down to 1.2200.
Lloyds Commercial Banking also regard 1.2300 as a watershed level, above which they are biased slightly bullishly and below slightly bearishly.
“Our studies still warn that a broader range is more likely.
“Further gains through 1.2475 would allow the market to test more meaningful resistance in the 1.28-1.30 region, while a move back through ~1.2300 should see a re-test of the range lows,” they commented in a recent note.
This also chimes with the views held by strategists at Commerzbank who see 1.2303 as a significant ‘flip’ level below which the outlook would become bearish again.
In a note to clients, strategists say:
“We expect to see several days of consolidation above last week’s low at 1.2304.
"While it holds the November 4 high at 1.2556 could be revisited and perhaps the 55-day Moving Average at 1.2618 as well. A drop below the 1.2304 level would put the 1.2090/85 October 11 and 25 lows on the map."
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3336▲ + 0.07%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2882 - 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.
Durable Goods Orders Spark USD Surge
The last 24 hours saw the Pound ticked higher against the Dollar as the UK Chancellor Hammond delivered a spending boost targeted at improving the UK's chronic productivity deficit.
The Pound / Dollar exchange rate traded to a high of 1.2435 as markets welcomed the announcement of a £23BN National Productivity Investment Fund and an increase in spending of £2BN on research and development.
However, the gains soon reversed amidst a widespread US Dollar surge that came on the back of some impressive US data releases at 13:30 GMT.
Durable Goods Orders shot higher by 4.8% in October, well ahead of the 1.5% forecast by economists.
"Incredible dollar rally continues after Durable Goods beat," says Richard Perry at Hantec Markets noting that other currencies like the Euro and Yen were suffering declines as the Dollar basket shot higher by half a percent.
Analyst Paul Sirani at Xtrade notes that after a couple of months in the doldrums the data shows, "durable goods orders are at their highest since February. This could keep Dollar-buying popular and also increase the likelihood of an interest rate hike."
With a Fed rate hike almost guaranteed in December this strong data will increase expectations for further rate rises in 2017.
“Dollar bulls remain in control,” says Kathy Lien, Director at BK Asset Management in New York, dips in the greenback have been shallow.”
Lien notes that U.S. Treasury yields have pulled back but not by much and more importantly, yield spreads continue to favour the Dollar.
“For example while 10 year Treasuries dropped 1bp today, German bund rates fell 5bp pushing the German - US Treasury yield spread to a fresh 16 year low. U.K. gilt yields also tumbled, dragging GBP/USD lower,” says Lien.
Momentum is certainly turning to favour the Dollar it would seem.
Autumn Statement: No Game-Changer for the Pound
The Pound moved higher against the Euro and other G10 majors as a result of the statement but against the Dollar we saw losses.
Granted, GBP/USD's decline is more a function of broad-based Dollar strength owing to some good economic statistics coming out of the United States today.
That said, analyst Viraj Patel at ING reckons any strength will ultimately prove fleeting.
"The Autumn Statement consisted of a series of small steps in the right direction, though we do not see these as having any game-changing implications for our bearish GBP outlook."
ING believe the UK’s large twin deficits (fiscal and current account) should not be underestimated as they will continue to exert downward pressure on GBP over the medium-term.
"Should the dollar remain strong, risks are that GBP/USD troughs out at 1.15 in 1H17," says Patel.
