British GBP/USD Exchange Rate Outlook: Upside Remains Limited says Commerzbank's Jones

GBP/USD retains a bullish bias having traded to a two-month best, but technical analysts warn upside scope is becoming increasingly limited.

The British Pound was the third-best performing currency in G10 for the week ending December 3.

The gains came amidst positive domestic data releases, a continued shift by traders out of their negative bets against the Pound and thanks to easing concerns over a so-called hard-Brexit. 

Indeed, this week's comments by senior Cabinet ministers that the UK would jostle for full access to the European single market in upcoming Brexit negotiations gave Sterling a notable push.

Brexit Secretary David Davis said the Government is prepared to consider paying for the UK to access the European single market.

The comments were backed up later in the day by Chancellor Philip Hammond.

Finally, the Government gave markets a peek of the cards they were holding; this will do a huge amount to alay concerns amongst UK businesses as to what kind of trading relationship they could expect once Brexit is done.

Importantly, from a currency perspective, the Pound liked the development.

“The remarks could be a sign that the government still might try to avoid what is known as a hard Brexit and instead settle for a more compromising exit,” says Thomas Nilsson at SEB. “The advance shows how sensitive the pound currently is to comments regarding the future relationship the UK will have with EU.”

Sterling shot higher against the Dollar as a result and broke above the 55 day moving average at 1.2509 which was a positive move from a technical perspective as it opened up the prospect of a quick move to higher levels now that resistance was cleared.

GBP is now is approaching the November high at 1.2674. "GBP/USD is gaining momentum, even though the momentum is not enough yet resistance at 1.2674 (11/11/2016 high," says analyst Yann Quelenn, a market strategist with Swissquote Bank in Gland, Switzerland.

That resistance is likely to be problematic for bulls hoping for an extension of the Pound's nascent recovery.

"The charts continue to suggest that upside scope is limited," warns technical analyst Karen Jones at Commerzbank.

"However we are cautious as yesterdays move looks quite directional. Above 1.2674/1.2700 sits the 1.2798/1.2866 area, made up of the July and August lows and 23.6% retracement of the move down from 2014. This guards the more important 1.3446 5th September peak," says Jones.

The analyst says only a drop below the 1.2372 level (uptrend) would put the 1.2090/85 October 11 and 25 lows on the map.

Failure at 1.2085 would mean a continuation of the descent and should trigger losses to the October low at 1.1938 (according to data from CQG).

Below it, Jones sees the May 1985 low at 1.1855.

"We regard the recent peak at 1.2674 as the end of the corrective phase and look for further losses," says Jones.

Also seeing recent strength within the prism of a broader downtrend is Robin Wilkin at Lloyds Bank.

Long term, while under the 1.30 region, Wilkin sees a greater risk of another downside test - after this medium-term range - but that should complete the bear cycle that started in 2007 at 2.1160.

"A major base is then expected to develop for an ultra-long term move towards 1.55-1.70 region, but that basing process is likely to be choppy and up to 2 years," says Wilkin.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3323▼ -0.03% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.287 - 1.2923
**Independent Specialist	1.3136 - 1.319 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

We also note that on the daily charts the GBP/USD has run into the the 100 day moving average.

The M.A, located at 1.2732 could see some solid Sterling supply which could ensure the exchange rate struggles at the start of the new week. 

At the time of writing the exchange rate is at 1.2733.

However it is also notable that moving averages (20 and 50 day) have offered little predictive powers in GBP/USD for some time now so we could well see the market move beyond this level over coming days.