The GBP/USD Capitulation Continues, Range Lows Now Being Targetted

Sterling remains a soft touch against the US dollar and euro as global market sentiment weighs.

Losses have come thick-and-fast for the British pound against the euro and US dollar, the two funding-currencies that tend to benefit when investors liquidated their exposure to stocks and commodities.

The reason is simple, the yen, US dollar and euro are all cheaper to borrow than sterling, investors have been borrowing these currencies to fund forays into the stock markets for years now.

With markets in sell mode the demand for these currencies has risen in order to settle those initial debts.

Thus, GBP/EUR, GBP/USD and GBP/JPY is showing a strong relationship with risk.

When will the selling stop then? Not anytime soon suggests Chris Weston at IG in Melbourne:

"For those who have traded the overnight move it almost feels like something big is brewing, similar to 24 August and the quasi-flash crash capitulation move we saw.

"These markets need a strong shake up and sharp downside move, followed by a wave of buying to settle things down. But until that comes there will be no clarity, absolutely no confidence and a bucket load of concern."

The Dow Jones plunged 330 points on the open ensuring the index fell through the 15900 mark to touch fresh week and a half lows.

The pound to euro exchange rate is now at 1.2862 on the open markets and it appears the exchange rate is making a hasty retreat into the mid-1.20’s just as we warned.

The pound to dollar conversion is now over 0.75% down on the day’s opening level at 1.4393.

“Sterling started the week with a dramatic drop, tumbling nearly 3 cents below last week’s one-month high against the dollar. America’s mixed but still solid jobs report proved the catalyst to tip the pound lower. Like the euro, recent sterling buoyancy traced back to dollar underperformance ahead of key U.S. jobs data last week,” says Joe Manimbo, forex analyst at Western Union.  

The outlook is negative from here as the recent corrective rally higher appears to have burnt out.

"We are viewing last weeks high of 1.4665 as the end of the correction higher. We note the Elliott wave count on the daily chart is indicating that this was the end of an ‘a-b-c’ correction. The market will have to move sub 1.4349 however to alleviate upside pressure and retarget 1.4151," notes Karen Jones, a technical strategist with Commerzbank.

Of course there are other GBP-specific issues weighing on the UK currency.

“The potential harm to U.K. growth from uncertainty over Britain’s place in the EU, coupled with the Bank of England’s dovish disposition, risks keeping the pound on volatile ground,” says Western Union's Manimbo.

Recovery Fails, Grind Back to Recent Lows on the Cards

The longer-term trend from the 2015 best at around the 1.60 region remains intact despite a February relief rally from the 1.4080 lows which had prompted speculation as to whether or not sterling-dollar had formed a base.

GBP/USD ultimately failed when it met the key downtrend resistance line located in the 1.4650 region.

"We have dropped back to around mid-range, after breaking support in the 1.4450/00 region. 1.4520/35 is intra-day resistance on rebounds, while under there and the key trend resistance highlighted above, the bias remains for a grind back towards the range lows," says Robin Wilkin at Lloyds Bank.

We read range lows as being the region above 1.41 but below 1.4250. Note that support here was significant, and we are hesitant to suggest a break of this level will transpire in the near-term.