Pound to Dollar: Finding It's Feet Amidst Heavy Selling

The Pound to Dollar exchange rate is bouncing off support after cascading lower ever since the 1.3260 highs.

"GBP/USD bearish momentum has stalled near key support at 1.2757," writes Swissquote's Yann Quelann.

"Hourly support at 1.2812 (12/07/2017 low) has been broken. (The pair) Expected to show continued bearish pressures," he continues.

However, he only sees the exchange rate supported temporarily:

"The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target."

The pair is plateauting at a robust support level according to Commerzbank's Karen Jones.

"GBP/USD probed the 1.2775/59 December 2016, late April and late May lows where it found short term support. We expect this area to continue to underpin today."

A tougher support level lies at the 50% retracement and 200 day moving average at 1.2688/54, and this constiutes a short-term downside target for the pair. 

Jones says that she thought the 1.3267 current August high was, "the end of the up move."

She says that as long as the pair carries on trading below the next lower 1.3031/49 May and August 11 highs immediate downside pressure will be maintained.

Backing up the bearish call is fundamental analysis from ING's Chris Turner who sees upside risks to the US Dollar (downside for the Pound) from today’s Janet Yellen’s speech in Jackson Hole at 15.00 BST.

"Conventional measures of equity valuation are extreme (US equities trade on a forward P/E of 18 versus a 10 year average of 14.5), credit spreads are very narrow (e.g. the Itraxx Crossover is under 250bp)," says Turner infering that Yellen may point to further interest rate hikes as a way of cooling down the market and avoiding financial stability risks.

A nod to higher interest rates would strengthen the Dollar, as higher interest rates attract more foreign capital inflows, from investors seeking yield. 

"Recent Fed minutes also saw staffers upgrade their assessment of asset valuation risks to financial stability to ‘elevated’ from  ‘notable’," said Turner, yet:

"Offsetting these concerns are the Fed’s assessment that the risks from financial leverage are low and that banks are much better capitalised/regulated than they were in 2007."

Turner notes how the very flat pricing of the US money market curve, which suggests markets do not expect the Fed to hike until Nov 2018, makes them sensitive to more hawkish comments, such as might come out of Yellen's speech.

"Any warnings over higher interest rates could provide the dollar with a little support. Here we are clinging onto our view held for much of the year that USD/JPY should be trading higher. We favour 111.00 over the short term," concluded Turner.

Yet not only is the analyst marginally bullish for the Dollar, he is also bearish Sterling, saying:

"We look for EUR/GBP to peak near 0.93/94 in 3Q17, right before the important EU council meeting on Oct 17 to assess Brexit progress," he says.

However, Turner does note how GBP’s biggest support is "under-valuation on a short term and particularly on a medium term basis."

From our own perspective, we look to the four hour chart for short-term guidance, and, whilst the pair is clearly in a protracted downtrend, it has also bounced and broken above a short-term trendline which is a bullish sign and backs up Swissquote's Quelann and Commerzbank's Jones' short-term support arguments.

Technically, however, the short-term downtrend is intact and expected to continue lower, with a break below 1.2774 leading a to continuation down to a target at 1.2670.