Is Sterling Now Due a Relief Rally?

GBP exchange rates have endured a poor start to the new year with UK economic releases failing to inspire confidence amongst market participants.

We have seen the pound dollar exchange rate (GBP/USD) fall from 1.5587 at the start of the year to fresh lows of 1.500.

As we note here it is not until long-term support at 1.40 is found that the selling pressure will meet a significant barrier.

With regards to the pound euro exchange rate (GBP/EUR) we see trade has been volatile with 6 year highs soon giving way to selling pressure.

At the time of writing however it is noted that the euro is once again coming under sustained pressure in anticipation of European Central Bank quantitative easing allowing GBP/EUR the chance to recapture lost ground.

Is the UK Currency Due a Rebound?

Has the selling pressure on the UK unit been overdone? While the answer is affirmative for the sterling euro rate, it is the GBP/USD where the question is harder to answer.

According to analyst Kathy Lien at BK Asset Management (pictured above), many in the markets will be sensing an opportunity to take advantage in a relief-inspired recovery.

Lien, who heads up the professional trading firm, says her team had been looking for sterling to drop to 1.50 versus the U.S. dollar this week and it came within 55 pips of that target on Wednesday.

The fall saw GBP/USD hit a fresh 1 year low in the process.  

“However an intraday recovery helped GBP/USD settle well off its lows by the end of the North American trading session.  Considering that this is the longest stretch without a positive day for GBP/USD since September, there's a significant risk of a relief rally,” says Lien.  

That said, with forecasters warning of further GBP losses against the USD in 2015, bounces will be viewed as an opportunity to sell.

Until the economic profile of the UK picks up once more we are unlikely to get any sense that the Bank of England will indicate an imminent raising of interest rates - the one scenario that would precipitate an end to the selling pressures on the pound.

US Dollar: Fed Minutes Come and Go

The January Fed minutes gave no clarity on the timing and the pace of the normalisation process.

Minutes stated that the normalisation should start as the core inflation approaches the Fed target and as the labour market shows further improvement.

It was noted that the sliding oil prices have been pointed as favourable for the economic activity.

Market climate remains firmly in favour of further USD gains.

Euro: Under Pressure

The fast deterioration in German factory orders (-2.4% on month to November vs. +2.5% a month ago) sent EUR/USD to 1.1804 on Thursday.

“The sentiment in EUR/USD remains comfortably negative despite the oversold conditions (RSI at 21%, 30-day Bollinger Band at 1.1854). Decent option related offers wait to be activated below 1.1800,” says analyst Ipek Ozkardeskaya at Swissquote Research.

EUR/GBP traded in the tight range of 0.78301/400.

The MACD stepped in the bull zone yet strong resistance is seen between 0.78508/0.78937 (area including 20, 50 and 100-dma).