Pound-to-Dollar Rate Downturn May Have Further to Run says Commerzbank

Modified: Tuesday, 12 February 2019 11:08 GMT
Written by: James Skinner

- GBPUSD downtrend has further to run, but momentum is waning.

- Commerzbank technical analysts are sellers of GBP, targetting 1.28.

- But FX desk's 2019 forecasts point to substantial upside later in year.

The Pound-to-Dollar rate could have further to fall, technical analysts at Commerzbank say, although momentum behind the decline is beginning to fade and the bank still projects substantial upside for Sterling later in 2019.

Pound Sterling has fallen by -1.5% against the Dollar during the last week in response to a series of adverse economic and political developments, although it remains the second best performing G10 currency relative to the greenback this year. The Dollar has also been resilient in this time.

Prime Minister Theresa May pledged last week to secure legally binding changes to the so-called Northern Irish backstop that is contained in the EU Withdrawal Agreement, although the EU has said repeatedly it will not entertain new negotations over the document.

After a weeks-long period where markets had become increasingly confident that a "no deal Brexit" would be avoided, May's insistence on pushing against a seemingly immovable object has advocated for renewed caution among traders. The economic news-flow has not been good either.

UK GDP growth fell by -0.4% durng the December month, according to Office for National Statistics data released Monday, while the economy grew by just 0.2%,down from 0.6% previously, during the final quarter as a whole. And that's just the latest economic news.

Above: Pound-to-Dollar rate shown at daily intervals.

"GBP/USD last week executed a hammer reversal pattern just ahead of the 50% retracement at 1.2830. This suggests that the move lower is probably done for now. The market has also reversed just ahead of 1.2808 the 55 day moving average," says Axel Rudolph, an analyst at Commerzbank. "The intraday Elliott wave counts however remain negative and we will hold onto our newly established shorts for today."

Rudolph says the Pound-to-Dollar rate will remain biased toward the downside the entire time the market remains below the 200-week moving-average, which was located around 1.3024 on Monday. The rate was quoted at 1.2852 Monday, down -0.53% for the session.

If the market manages to recover above the 1.3024 level it would then have a clear run at the 1.3217 recent high, Rudolph says. He is betting against the Pound-to-Dollar rate and targeting a move down to the 1.2830 area, although he has a stop-loss set at 1.3050, which means he will abandon the bet if the market hits that level.

Above: Pound-to-Dollar rate shown at weekly intervals.

As a technical analyst concerned with trends, Rudolph's views are generally all very short-term in nature and can change at the beckon call of the market. However, the Commerzbank currency team does also produce longer-term forecasts and those suggest Pound Sterling could rise substantially in the year ahead if things go Commerzbank's way.

"It is more likely that the Brexit date will be postponed at the last minute. This leaves ample room for maneuver for all concerned. The Pound is likely to appreciate in this scenario, as a postponement should be seen as a signal that British policy will continue to at least prevent the "No Deal"," says Ulrich Leuchtmann, head of FX strategy at Commerzbank.

Leuchtmann has told the bank's clients that an extension of the Article 50 EU exit period is likely to be unveiled during the weeks ahead because there is no majority among lawmakers in the UK parliament for anything that relates to Brexit, and the current legal position is the nation leaves by default on March 29.

If March 29 passes and the UK has not ratified the withdrawal agreement then it will automatically leave the EU and default to trading with it on World Trade Organization terms (WTO), which economists say would be bad for growth.

This extension of the Article 50 period would be for an unspecified period of time but, crucially, would remove the threat of a dreaded and widely maligned no deal Brexit from the table. It would also give Brexit-fearing financial markets and analysts a glimmer of hope that the entire thing may eventually be called off, prompting a recovery by Pound Sterling.

Commerzbank forecasts the Pound-to-Dollar rate will rise to 1.34 by the end of March and 1.39 in time for year-end.

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