GBP/USD Exchange Rate Outlook: Fade GBP/USD Rallies
The Pound to Dollar exchange rate continues to weaken with the British Pound unable to escape the ‘larger’ currency's gravitational pull.
The pair has fallen through the course of December as the US Dollar found a strong bid on the back of the Fed's interest rate hike and communication that suggested up to three further interest rate rises could be on the cards in 2017.
Scotiabank’s FX Strategist Shaun Osborne sees more downside on the horizon for the pair as the US Dollar should remain dominant for some time to come.
“Daily/weekly price action looks negative, as the recovery from early October has broken down and trend strength indicators are bearishly aligned across short, medium and long-term oscillator signals—this typically means limited scope for gains and more losses ahead,” says Scotiabank's strategist, who advised traders to, “fade GBPUSD rallies," in his note on the pair.
Osborne sees GBP/USD falling to a target at 1.2000 eventually.
We also see more downside, with a break below 1.2200 confirming more downside to an initial target at 1.2100.
Supporting the bearish view is the MACDindicator, which has crossed below both its signal line and the zero-line and is providing a bearish signal.
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 - 1.3202 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Elliot Wave Studies Offer a Big Warning
According to a form of cycle analysis called Elliot wave theory, the GBP/USD exchange rate could be in a final wave lower.
The idea of applying Elliot wave analysis to the current market conditions originated with J P Morgan who published a note on GBP/USD in October.
Their analysis appears to have been unerringly accurate in describing the pair's trajectory so far.
J P Morgan labelled the move down to the October post-tory-party conference lows as a wave 3, and the recovery since then up to 1.2770 as a wave 4 (see chart below).
They predicted the end of wave 4 in the 1.2650 – 1.2800 zone, which has so far been quite accurate given the early December peak was at 1.2770.
There is now a possibility that wave 5 could be evolving. is now possible that wave 5 is moving down with an eventual medium-term target at the October lows at 1.1450, assuming their analysis is correct.
This would suggest a move down, with an eventual medium-term target at the October lows at 1.1450, assuming their analysis is correct.
Wave 5's are the final impulse waves in the longer term trends so after it has completed the pair would be expected to rally strongly.
Wider UK Current Account Deficit Weighs
Recent data has been mixed for the Pound.
UK third quarter GDP data was revised up to a final reading of 0.6% from the 0.5% previous estimate, and whilst this was a positive sign, especially in the face if Brexit headwinds, it was offset by the widening Current Account deficit during Q3.
The Dollar, meanwhile, continues to rise in expectations of further interest rate hikes by the Federal Reserve in 2017.
A further boost to the Dollar comes from firming expectations of more fiscal stimulus from the President-elect Donald Trump, who is currently still promising a massive dose of fiscal stimulus, suggesting the policies will not be watered down once he has started his tenure.
Data Ahead for the Pound
The main data release for the Pound this week is the British Banking Association’s data on Mortgage Approvals, which is forecast to show a rise to 41.6k in the month of November from 40.3k in October.
Data Ahead for the Dollar
Data for the Dollar kicks off with the S&P Case-Shiller House Price Index in October, at 14.00 (GMT) on Tuesday, December 27, which is forecast to rise by 0.5% month-on-month and 5.1% year-on-year.
Given some analysts see a chance of a slowdown in US housing in 2017, any property-related releases may be the subject of more scrutiny than usual.
On Wednesday, December 28 we have yet more housing data, first, in the shape of MBA Mortgage Applications at 12.00 and then Pending Home Sales at 15.00, which are supposed to show a 0.5% rise month-on-month in November.
On Thursday, there is the Advanced Trade Balance in November at 13.30.
Also on Thursday at the same time are Jobless Claims for the week ending December 24, which are supposed to show a 277k rise.
EIA Crude Oil Stocks are released at 16.00 on Thursday and forecast fall to -0.3m barrels, in week ending December 23.
Finally, on Friday, Chicago PMI’s are released and expected to fall to 56.8 in December, at 14.45.
This is then followed by the Baker Hughes Oil Rig Count at 18.00.
