Studies Show GBP/USD X-Rate Could be Headed to 1.1450
- "We look for the market to come under increasing downside pressure" - Karen Jones @ Commerzbank
- Elliot Wave studies by J.P. Morgan suggest move back down towards the flash crash lows at 1.1450 could unfold
The US Dollar has easily been the best-performing major global currency over the course of the past week as markets race to price in the prospect of three hikes in the US next year.
Markets were caught short going into the December Fed meeting as they were expecting a repeat of September's forecasts that anticipated only two hikes would be likely over the coming 12 months.
Higher rates command higher inflows of capital into the US which in turn bids up the Dollar.
The US Dollar index - the value of the Dollar against a basket of currencies - is an eye-opening 1.5% higher driven largely by the slump in USD/JPY and EUR/USD which has fallen to its lowest level since 2013.
"We can sum up the technical aspects of the Fed meeting in two words: upside skew and given that it’s been a while since we've been able to say that, it is hardly surprisingly to see the broad-based Dollar rally," says Viraj Patel at ING in London.
The Pound has meanwhile been the best performer against the US Dollar having only suffered a 1.11% weekly decline at the time of writing.
Nevertheless, it appears that the outlook for the Pound against the Dollar has clouded and further losses are now likely. Those with foreign exchange payments looming should ensure they have the relevant stop orders in place to protect against such an eventuality.
"GBP/USD has failed at the 1.2692 resistance line drawn from September. Last week the market failed at the 1.2746 100 day ma
and we look for the market to come under increasing downside pressure," says technical strategist Karen Jones at Commerzbank.
The two month uptrend has been broken and this was regarded as the break down point to the 1.2090/85 October 11 and 25 lows.
Jones says intraday rallies are likely to now struggle circa 1.2590, and remain capped 1.2703/76. Initial support below the uptrend lies at 1.2302/1.2285.
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.
J.P. Morgan Techs on the Money
The recovery from the flash crash October lows at 1.1450 has evolved to its full potential which was forecast by technical strategists at J.P. Morgan as far back in October.
Basing their analysis on a type of cycle theory called Elliot Wave theory J.P. Morgan predicted the exchange rate would recover in a corrective wave 4 to about the 1.2650-1.2800 zone.
After that they forecast a resumption of the downtrend in a final wave 5 lower – wave 5’s being the final waves in larger impulse moves in line with the longer-term trend.
This could signal a move back down towards the flash crash lows at 1.1450 is about to unfold if J P Morgan’s predictions come true.
It is uncanny how these predictions are playing out.
As far as our own forecasts go we see the possibility of a rotation lower, with a break below the 1.2545 range lows as providing confirmation and leading to a sell-off down to the pivot and 50-day moving average at 1.2475.
For more losses below that we would want to see a clearance below 1.2390, with the next target at 1.2300.
Time to Sell
Meanwhile, the Bank of England's December policy meeting failed to rescue the Pound.
ING's Viraj patel also believes Sterling is pointed lower against the Dollar from here thanks to a market mispricing in expectations over future BoE policy.
"It seems that markets have recently adopted an “inflation nutter” approach, a termed once coined by Mervyn King alluding to a central bank's overemphasis on inflation at a cost to the real economy. Dovish BoE repricing risks in 1Q17 makes GBP a Sell," says Patel.
Indeed, there is a wide-held view in the analyst community that the recent rally in Sterling - in place since October - is unlikely to last.
Analyst Lucy Lillicrap at AFEX went as far as calling the bounce a cyclical discrepency in a recent note.
"Sterling is currently in a somewhat novel situation given its performance over recent months of finding support against most other G10 currencies but recent gains look at best the result of cyclical discrepancies rather than any major trend reversal,” says Lillicrap.
The analyst reflects that while GBP/USD could hit 1.2850, or even 1.3000, neither level is considered sustainable beyond December.
In fact, based on current price action, event 1.2850 looks to be out of reach.
