GBP/USD Rally Still has Fuel in the Tank say Credit Suisse Tacticians

• GBP/USD undergoing consolidation
• But technicals advocate GBP/USD upside
• Defying analyst predictions for a decline
• UK economy set for 2.0% GDP decline in 2023

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Tactical strategists at Credit Suisse are looking for an extension higher in the recent rally undertaken by the Pound to Dollar exchange rate (GBP/USD) since September.

The call comes as Pound Sterling etners a period of consolidation having endured a multi-week period of appreciation against the Dollar, gains which have left many analysts scratching their heads.

After all, the consensus narrative on the UK economy is that it has fallen into recession and will be among one of the worst-performing developed market economies in 2023.

But this is the nature of consensus expectations: they result in trades that get too crowded and are prone to notable reversals.

And herein lies one of the strengths of technical analysis and strategy: it cuts out the noise and looks at the price action for clues as to future direction.

"We look for further strength in due course to the May high at 1.2668, potentially 1.2758," says analyst David Sneddon at Credit Suisse, who is part of a group of technical analysts we are following inclined to respect the current trend in GBP/USD.

GBP/USD rallied sharply in the midweek session in a reminder that it might yet be too soon to call an end to the recovery that has been in place since late September.

Spot is currently quoted at 1.2225 but Sneddon says near-term the market could consolidate unless it breaks above the August highs at 1.2278/98.

Until such a moment, "we continue to look for a consolidation phase to emerge in the near term," says Sneddon. (Consider setting a free FX rate alert here to better time your payment requirements.)

Above: Analysis of weekly GBP/USD chart, courtesy of Credit Suisse.

But "big picture, we look for this to be temporary, with further strength expected in due course to resistance next at 1.2408," says Sneddon.

The next upside target to test would then emerge at 1.2519 and eventually, the May high at 1.2668, potentially even as far as the 61.8% retracement at 1.2758, says the analyst.

Looking at the downside, support is identified initially at the 13-day exponential average and minor retracement support at 1.2049/46, but with fresh buyers expected here for now.

"A close can see a deeper setback to what we expect to be much stronger support at 1.1900/1.1874," says Sneddon.

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Although tactical traders are looking to respect momentum and price direction, those analysts who are more inclined to look at UK economic fundamentals retain a bearish bias towards the Pound.

"The growing macro risks in the UK suggest this might prove to be a temporary bounce, while the dollar has also found renewed strength in recent trade," says Fawad Razaqzada, Market Analyst at City Index.

He notes the UK economy faces a period of industrial action in December as numerous unions prompt their members to withhold their labour.

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"Hundreds of thousands of workers across the country are going to strike across industries in disputes over pay, pensions, jobs and conditions. Among other, they include rail staff, bus drivers, nurses, civil servants and postal workers. Given that this is happening just weeks before Christmas, we could see a noticeable hit to an already weak economy," says Razaqzada.

The economy contracted in the third quarter and all signs point to another quarterly fall, ensuring the technical conditions of an official recession are met.

"2023 will be a tough year for the economy as the effects of the previous rises in inflation and previous hikes in interest rates," says Paul Dales, Chief UK Economist at Capital Economics.

Capital Economics expects inflation and interest rates will be a bit higher than most forecasters expect in 2023 explains why they think the recession will be deeper and will involve a 2.0% fall in real GDP.

"We continue to view GBP as vulnerable and see a strong risk that cable will spend much of next year below 1.20," says Jane Foley, Senior FX Strategist at Rabobank.

"We expect choppy conditions in cable and for near-term activity to be mostly guided by movement in the USD. While we are not expecting to see cable re-visit it post mini-budget low in the coming months, we do see the potential for further sharp dips in cable next year," she adds.

As investors prepare for next week's packed calendar, GBP/USD could consolidate over the coming days.

Key near-term events to watch are the release of U.S. inflation data on December 13 where an unexpected rise in prices will almost certainly see the Dollar rip higher.

The Federal Reserve rate hike decision then falls on December 14, providing another crucial moment for the Pound-Dollar.

A 50 basis point hike is expected, but the updated guidance and projections for future rate hikes will have the greater impact: a message that rates would be required to rise substantially higher than previously anticipated would ignite Dollar gains.

The Bank of England meeting then falls on December 15 where a 50 basis point hike is anticipated.

Again, it is guidance that will determine the market reaction, although there will be no new forecasts issued by the Bank's economists.

Any indication that the Bank will continue to hike to meet market expectations will likely keep Sterling supported.