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."

Image courtesy of Commerzbank.

"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 week at 1.3084. It had been as high as 1.3218 on January 25 which represents the best exchange rate for Dollar buyers since October 2018.

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 U.S. 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.

Such an outcome would be supportive of the Dollar we believe.

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