- Sterling has just pierced a key chart level against the Dollar, the 200-week MA
- There is now a higher chance of a continuation of the uptrend
- Source of Pound strength remains something of a mystery
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The Pound is trading at its highest levels since early February with 1 GBP buying 1.4260 USD, a notable recovery considering that the exchange rate had been as low as 1.3966.
Concerning the outlook, short-term momentum appears to reside with Sterling but we hear much depends on the success of Sterling in breaking above a key level which has in the past prevented further upside progress.
The level in question is the 200-week moving average (MA) at 1.4244, we believe a weekly close above this MA would be a bullish sign and might indicate further upside on the horizon.
Analysts see risks skewed to the upside should the 200 day MA be breached.
We reported yesterday that Jones was warning that a break below 1.40 was still likely but for Karen Jones, an analyst at Commerzbank, the outlook will turn more bullish if the 1.4345 high were surpassed since it guards the next target at 1.4565 (the April 2015 low) "and the 1.5000 region".
"Prices are starting to push through our 1.4185-1.4250 resistance region. With momentum still in bull mode and monthly seasonals biased to the upside, the risk is we push up to test the 1.4350-1.4550 medium–term region of resistance again," says Robin Wilkin, cross-asset strategist at Lloyds Bank Commercial Banking.
Bullish momentum is expected to be capped at 1.4350-1.4550, however, and "prices to drop back as part of a broader range," adds Wilkins.
More sceptical of further upside, is Quek Ser Leang, an analyst at UOB, who says the rally appears to be running ‘too far, too soon” and 1.4310 should cap it.
For some, the Pound's exceptionally strong performance over the last 24 hours remains a mystery.
Sterling has broken out of a 6-month range against the Euro and is now above the 200-week MA against the Dollar, but the real reason behind the Pound's strength is not clear.
"We are frankly at a loss trying to explain the near vertical move over the past 24 hours, but it has all the signature characteristics of a vicious short squeeze precipitated by the break of a key support level in EUR/GBP," says Boris Schlossberg, managing director at BK Asset Management.
By 'short-squeeze' he means the phenomenon where a large number of bearish bets - in this case against Sterling - suddenly capitulate when the market turns around and starts going up, and this adds fuel to the recovery.
The growing divergence between expectations for the trajectory of UK and Eurozone interest rates are a factor supporting the Pound.
The European Central bank (ECB) is not expected to raise rates until well into 2019 whilst the Bank of England (BOE) is forecast to increase then at its May meeting.
"Yesterday's surprisingly dovish ECB minutes triggered a flurry of selling in the pair as the market started to factor in a rate hike from the BoE while assuming that the ECB will remain stationary well into 2019," adds Schlossberg.
"All of this has fueled a vicious one-way move in cable, despite the fact that the latest UK economic data continues to disappoint, " says Schlossberg, who thinks the market is overoptimistic about Brexit negotiations because of the "impasse" over the Irish border, and "given the intractability of the problem, it's difficult to see a path forward."
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