Pound Sterling Forecasts: Back to 1.13 Pivot vs. Euro, 1.25 is Support vs. Dollar
Image © John Gomez, Adobe Stock
- Pound-Euro rejected at 1.16 resistance
- Pound-Dollar outlook deteriorates on break below 1.30
- AFEX see choppy, forecast consolidation for both pairs
Following a strong start to the year, the British Pound has come under pressure this February amidst a combination of Brexit angst, softer-than-expected economic data and technically-driven order flow.
Technically-driven order flow is particularly notable with the Pound's turnaround against the Euro occurring at a major resistance point in the market, leading us to believe the Pound would perhaps always have been liable to turning lower when it did, regardless of the news flow surrounding Brexit. Indeed, we are not picking up any game-changing headlines on Brexit, and neither are we convinced economic data will be of much significance until a Brexit resolution is found.
"One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment," says Piotr Matys, a strategist at Rabobank who succinctly highlights importance of technical studies when considering exchange rate movements.
Technically-inspired selling in the Pound-Dollar exchange rate has been particularly evident over the past 24 hours now that the pair has fallen below the key 1.30 region, this sets up a softer outlook for the exchange rate near-term.
Where next then for the Pound against the Euro and U.S. Dollar in a market that appears to be increasingly in the grip of technical trade?
Pound-Euro: Predictable Weakness
The Pound-to-Euro exchange rate is currently located towards the top of a side-ways orientated range, and the most likely route forward is a reversion to the pivot of this range towards 1.13.
The Pound and Euro have occupied a range bounded by 1.10 at the bottom and 1.16 at the top, and foreign exchange strategist Trevor Charsley at AFEX, a foreign exchange brokerage in London, tells us this state of affairs is unlikely to change in the near-term.
"Sterling prices have evidently been rejected (again) around 1.1600 over recent days - which preserves the broad range here for now at least," says Charsley. "This re-consolidation pattern extends back toward 1.1000 and thus values are in effect continuing to pivot 1.1300 or so."
Longer-term, AFEX note Pound Sterling technicals remain negative with post-2016 relative stability ultimately seen as corrective only.
"However no obvious/direct path lower exists either at present and further choppy sideways action would thus not surprise before an eventual break-out develops," says Charsley.
The range-bound narrative dominating GBP/EUR can also be applied to the GBP/USD exchange rate.
"Recent/sharp GBP advances notwithstanding the market here remains at best rangebound in weekly terms while 1.3300 area resistance remains undisturbed," says Charsley.
For those concerned that a deterioration in the ongoing Brexit saga might pressure Sterling, Charley says studies suggest limited downside risk (this year) below 1.2500.
"Further choppy consolidation is nonetheless anticipated for now," says Charsley.
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Pound-Dollar: "Extreme Caution is Warranted"
The Pound is losing momentum against the U.S. Dollar and looks to be turning lower according to a noted technical analyst.
In a briefing to clients on Tuesday, February 05, Karen Jones with Commerzbank says "extreme caution is warranted" on the GBP/USD exchange rate as "the daily RSI is breaking lower and this does reflect a loss of upside momentum."
"GBP/USD is starting to erode the 200 day ma and the daily Elliott wave count is suggesting a deeper retracement to 1.2940," says Jones. "Below 1.2940 would allow for slippage to 1.2802 the 55 day ma and potentially 1.2669/62, the August low."
However, Jones also cautions that the intraday Elliott wave counts remain positive "and for now we will stand aside".
The Pound-Dollar exchange rate is presently quoted at 1.3042, having started the new week at 1.3084.
We have seen the U.S. Dollar grow in strength over recent days on the back of some better-than-forecast U.S. economic data releases which suggest to markets that they might have been too pessimistic on the U.S. economy, and by extension its Dollar.
Markets no longer expect any interest rates to be delivered in 2019 owing to a slowdown in economic momentum, however this view is being revised and could be brought in line with the Fed's own expectations for up to two interest rate rises in 2019.
"As per the current dot plot, the US Federal Reserve expects two more rate hikes in 2019 which in turn will possibly see the benchmark UST yield curve shifting upward, causing bond prices to fall. Though market is pricing no more rate hikes in 2019, we think the possibility of inflation picking up and the Fed managing to do one or two more rate hikes is reasonably high," says Anita Yadav - Head of Fixed Income Research at Emirates NBD.
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