Pound Sterling: GBP Technical Outlook Starts to Improve vs USD and EUR

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Looking Ahead - For GBP-USD, a Break Lower on the Cards

This time Swissquote look at the GBP-USD, saying that because UK economic data surprises are fading (i.e growth is settling down to a comfortable pace), strength in GBP-USD will likely fade:

"GBP/USD has been confined to a daily rising wedge with a possible false break higher at 1.6823. This now warns of a corrective phase which has the potential to move sharply lower if a break back under 1.6460 (24/03/2014 low) can be realised. At best, given the current technical backdrop, we would expect to see a continuation of the largely range bound trade that we have already seen thus far."

Looking Ahead - Forecasting a Rise in EUR-GBP

The euro is forecasted to outdo the British pound in coming weeks; this is according to the team at Swissquote Bank who say:

"We wrote about EUR/GBP at the start of the year anticipating strong support near 0.8225 (28/12/2012 high).

"The trade that followed looks to  have created a mid-term basing formation with an 0.8168 / 0.8158 double bottom. This set-up has led to a break back over 0.8350 (06/02/2014 high).

"In doing so the multi-week falling wedge that has been in place since October 2013 can also be considered as complete. We see the structure present since the 0.8158 low, as being bullish in nature, providing a foothold can be maintained above 0.8158 (17/02/2014 low).

"If a  subsequent push over 0.8400 (19/03/2014 high) can also be realised, then an immediate challenge of the 200 day moving average is anticipated  currently at 0.8419. This should then open up scope for a return to the  0.8815, 2013 high. Failure to hold above 0.8158 would negate our longer  term bullish view."

15:26: Overall picture turns positive

Gainsy on the GBP/USD:

"GBP/USD rose today to a fresh weekly high at 1.6598, after taking out the short term resistance of 1.6555 which represents the 200 HMA and a downwardly-sloping trend line off March highs.

"The pair reversed course and declined back to re-test the previous ceiling which seems holding so far, therefore we could expect a fresh bull attempt in the coming hours towards the 200 4H-MA at around 1.6625.

"The pair hit our expected target and the overall picture has turned bullish."

15:16: Bargain hunters seek out cheap GBP-CAD

The GBP-CAD remains weak, but bargain hunters are beginning to step into the market, as noted by Shaun Osborne at TD Securities:

"The short-term picture for the cross looks a bit more constructive with the market accumulating “cheap” GBPs on this morning’s approach to the 1.8285 area—where the market based earlier in the month.

"This has averted the quadruple top trigger breakdown and the immediate threat of a drop to the 1.80 area has been averted. Gains back above channel support (now resistance) at 1.8450 are needed to see a deeper stabilisation/improvement."

14:46: Relief for GBP-AUD ahead?

Sterling has, alongside many other majors, had a torrid time against the Aus dollar lately.

It is with this in mind that we take note of the viewpoint held at Bank of America Merrill Lynch which suggests there still exist dangers of an interest rate cut in Australia. This is a GBP-AUD positive:

"It remains our view that the RBA will potentially need to reduce rates further in the second half of this year. The basis for our forecast encompasses the still many challenges the economy must face over this and coming years.

"Despite recent encouraging data flow in some sectors, we believe it is premature to forecast rate rises this year. This is because we have seen very little of the decline in the mining investment cycle that is imminent. Further, there are few convincing signs of recovery in the non-mining economy outside of the housing sector."

13:19: EUR makes a comeback, but what does next week offer?

The euro has edged higher over the past couple of hours pushing the GBP/EUR below 1.21 again.

Note the CAD and AUD have simultaneously eased back, this confirms the views of those saying the EUR is being used as a funding currency at present. Investors are using cheap EUR to take advantage of higher yielding rates in countries like Australia and Canada.

But what does next week offer for the Euro?

UniCredit say: "The ECB meeting will be next week’s top event. We expect policy settings to remain unchanged, as the slowdown in March CPI (out next Monday) is likely to be largely driven by temporary factors. The most important issue will be if and how the ECB will decide to become more vocal about the currency. We think Mario Draghi will adopt a "soft" strategy here, dealing with the exchange rate only in the Q&A session and stressing that the ECB stands ready to act if currency appreciation were to endanger price stability."

11:35: The outlook brightens for the UK pound

Luc Luyet at Swissquote Research says the technical outlook against the USD and EUR is starting to improve for the UK unit:

"The Cable started the week at Nov/Mar uptrend channel base (1.6460/70) and gained as data came in. On a side note we would like to emphasize that, although the softness in inflation figures are supportive of BoE’s forward guidance on low interest rates, the weakness below 2.0% official target brings a EUR-like dynamic in GBP vis-à-vis the inflation readings, where traders price the upside pressures in real interest rates instead of dovish BoE. Technically, the short-term bearish momentum in GBPUSD flattens this week; the MACD (12, 26) indicator will step in the bullish zone for a daily close above 1.6680. We see support building at 1.6576/1.6619 (21 & 50 dma) zone.  The Cable is likely to close the week on positive note.

"Failure to clear resistance above 0.83915/0.84000 (Fibonacci resistance & optionality) pulled EURGBP below 0.82500 for the first time in three weeks. Trend and momentum indicators turned sharply negative. A close below the 50-dma (currently at 0.82770) should signal the extension of weakness to the month lows of 0.82000."

11:17: Bias is higher

Forex.Com have just updated on Cable:

"GBP/USD holding above 1.6600 for now after mixed UK data. Below 1.6600 paves way for 1.6555. Bias higher above 1.6640-55 (resistance area & 50% of the last downswing)."

11:14: Bullish view maintained on sterling

"Very strong retail sales in the UK drove cable above 1.66, but some consolidation is likely today, also lifting EUR-GBP back above  0.83. Medium term we reiterate our bullish view on cable." - UniCredit Bank.

10:00: Data updates

A few data releases have come out over the course of the past 24 hours. The important point to note from a currency perspective however is that they have had little impact on rates.

The UK Current Account (Q4) is firmly in deficit territory, the reading came in at £-22.4B, worse than predicted at £-14.0B. The big long-term issue for the UK economy and currency concerns the closure of this deficit.

Economic Sentiment Indicator (Mar) in the Eurozone beat expectations at 102.4, expectations were for 101.4.

09:02: Getting ready for a small rebound in EUR

Karen Jones at Commerzbank says the EUR-GBP could recover some ground in a correction:

"EUR/GBP has sold off to stronger support circa .8281/79 (50% retrace and Fibo). This has seen a small erosion, however we note the 13 count on the 60 and 240 minute chart and the TD resistance at .8260/45 and suspect that we will see near term consolidation/ a small rebound.

"Current Position: Shorts from .8373 covered .8280. Recommended trade: Attempt small longs at market, add .8255, stop .8240. Exit .8325."

08:58: Trend, momentum 'significantly better'

"GBPUSD extends gains to 1.6647 on better-than-expected retail sales of 1.7% in February. The Cable saw decent support at the Nov-Mar uptrend base this week. Trend and momentum indicators are significantly better, the MACD (12, 26) will step in the bullish zone for a daily close above 1.6680. UK’s 4Q final GDP data is due today. The consensus is 0.7% growth q/q, 2.7% y/y." - Swissquote Bank.

08:22: Today's agenda

There are no major UK economic releases at hand for today, but we do have current account numbers for Q4 which could show some improvement, but the current account deficit remains a longer term problem for GBP.

08:16: The carry trade is on!

Why are the NZD, CAD and AUD winning? Because holding cash their offers investors better yields. With the prospects of improved US yields slipping demand for these rival currencies hots up.

"Once again the USD was a comparative sideshow yesterday, gaining against the EUR, CHF, JPY and SEK but falling against the higher yielding G10 currencies, suggesting once again that the carry trade is on," say Lloyds Bank Research.

Further, "As mentioned yesterday, this makes some sense given the exceptionally low levels of FX volatility – both implied and realised – though the similarly low level of yield spreads rather diminish the rationale for carry."

08:12: CAD, AUD and NZD continue to show strength

The commodity dollar complex is seeing strong interest as the US yield curve flattens. The Canadian dollar continues to stage a comeback against its US counterpart, and this is in turn hurting the GBP-CAD. However, as we mentioned on the Pound Sterling Live yesterday, it may not be time to back the CAD fully yet.

08:00: Further gains in GBP-EUR

The pound to euro exchange rate is another 0.34 pct higher on Friday morning, the rate is now quoted at 1.2125. Considering that we started the week with the rate testing a break lower through 1.19 this is a powerful comeback. We would imagine that a run up to 1.22 is possible, but expect a slowdown in the pace as we note the currency pair has been unable to convincingly crack this ceiling thus far in 2014.

Past 24 Hours: Stronger performance by GBP

Lloyds Bank on the dynamics driving the UK pound over the past 24 hours:

"Strong UK retail sales yesterday ensured a continued strong performance from GBP, though it is notable that this came without much movement in UK front end yields, and GBP strength was most notable against the EUR. Nevertheless, EUR/GBP didn’t manage to break the key support level at 0.8260, and this may prove difficult today if there is some pre-weekend position squaring.

"While yield spreads still suggest there is some GBP upside against the EUR and CHF, we would not expect all of the recent lost ground relative to yields to be made up, as some of the strong EUR performance relates to the strong Eurozone current account position and “natural flows” into the EUR that result. While the UK retail sales data is encouraging, it is also indicative of the domestic demand basis of the UK recovery, and this may prove a drag via net trade flows in the longer run."