Downtrend in Pound to Dollar Rate Tipped to Fade
GBP/USD is in a short-term downtrend on the four-hour chart which may take it down to support at the S2 monthly pivot at 1.2120.
The MACD momentum indicator is converging with the exchange rate which is a bullish sign as the lower lows of the exchange rate were not matched by momentum.
The pair is likely to stall at 1.2120, therefore, if it falls to the monthly pivot and intersects with it.
Monthly pivots are levels watched by professional traders, which are calculated using the open, high, low and close of the previous month, which then become areas of support and resistance which obstruct the flow of the trend.
A move below the 1.2150 level would probably provide some confirmation of more downside to the aforesaid target.
Analyst Karen Jones at Commerzbank in London confirms her studies maintain the GBP/USD near-term outlook to be negative:
"Sterling’s sell-off has reached the 78..6% retracement at 1.2142, coupled with a 13 count on the 240 minute chart, we would allow for a minor rebound ahead of further losses to 1.1988/80 recent low and the bottom of the 5 month range at 1.1927. The market will stay directly offered below the 1.2378/1.2407, the 55 and 20 day moving averages."
Fundamentally, the exchange rate has had a punishing few months with the uncertainty of the Brexit negotiations causing capital flows away from the Pound.
And the past week has seen a rapid descent for the GBP/USD as sentiment has flowed strongly into the Greenback as speculation of an impending FOMC rate hike has continued to mount. Subsequently, we have seen price action drop from around the 1.2600 handle to its current level at 1.2160.
However, it remains to be seen how much further the embattled pair will go given that we are now nearing the depths of the October 2016 low.
“The near term outlook is not highly negative despite ongoing rhetoric around the impact of an exit from the EU. Inflationary pressures are starting to awaken in the UK and GDP is proving to be relatively robust in light of the ongoing uncertainty," says Steven Knight, Blackwell Global Investments Limited.
Subsequently, Knight believes there are plenty of fundamental factors to suggest that the currency pair’s current malaise is a temporary decline.
Dollar Fired-Up by Strong ADP Report
The US Dollar continues to charge higher on solidified expectations for a March interest rate rise, and increased expectations for subsequent rises.
The latest bout of confidence comes from an unexpectedly strong ADP report which leaves virtually no doubt that the Fed will hike rates this coming week.
The US economy added 289K new private jobs in February, versus 187K expected and 246K printed a month earlier.
"A Fed hike on 15 March is seen as a sure thing and fed funds have discounted the surety of two more hikes by year-end. How much more of a boost the USD can get from rate expectations remains to be seen," says Sue Trinh at RBC Capital Markets in Hong Kong.
