Soc Gen Eye GBP/USD Support at 1.3660
Alvin Tan, a foreign exchange strategist with Société Générale has given clues as to where the ongoing rout of the Pound by the U.S. Dollar might end.
Tan tells clients in a weekly strategy brief that he has his eyes on the base of a double-top formation on the GBP/USD exchange rate's charts:
"Cable is approaching the confirmation level of the double top pattern at 1.3660, which would be a major technical support level according to our technical analysts," says Tan.
A broadly softer Pound, combined with a rejuvenated Dollar means the Pound-to-Dollar exchange rate has been in decline for 9 of the past 10 trading days, declining from an April high at 1.4376 to register a low at 1.3715. At the time of writing we are quoting 1.3748.
Stepping away from the Pound's technical outlook, there is not a whole lot of confidence at Société Générale that the Dollar's strong run of late has the legs to extend all that much further, "the Dollar is rampant, but we remain unconvinced on the rally's sustainability," says Tan.
Much will depend on the U.S. Federal Reserve's May 1-2 meeting where markets will be scrutinising officials for signs that a faster pace of interest rate rises is on the cards.
Such a hint would likely play positive for the Dollar, and heap further pressure on the Pound.
"The FOMC meeting is likely to be a quiet affair, but there is a heavy data calendar this week. The Fed has no incentive to excite the market further when the latter is pricing in more than three hikes in total this year. PCE inflation, manufacturing ISM and the employment report however could have an impact on the Dollar," suggests Tan.
Furthermore, there is the question of seasonality to consider now that we are exiting what is traditionally a very strong month for the Pound against the Greenback.
"The pattern in cable of thirteen straight years of positive April returns is on the cusp of being broken this year. For what it's worth, May has tended to be a negative month for cable, but you can decide if you want to play the seasonality or contrarian trade on this fact," says Tan.
It would appear that the 'buy the GBP/USD in April' trade will leave some burnt fingers behind it, we would doubt that many participants would be making the mistake of trading on seasonal trends going into the new month.
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