Beware a Deeper Pound Dollar Exchange Rate Correction Lower Warns Bank of America (GBP-USD)
- Written by: Gary Howes
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Thursday sees the pound to dollar rate give up some of Wednesday's gains but the technical outlook favours GBP after decent data out of the UK saw GBP find favour right across the board. But, Bank of America offer a significant longer-term warning.
The pound to dollar exchange rate has eased back on Thursday, but the move could be merely corrective following on from a strong 24 hours.
Overnight, a Short-Term Bullish MACD formed at the close of 1.6720 as did a fresh positive Momentum signal. This confirms the near-term outlook is positive. A look at the markets currently shows:Exerting pressure on the USD was a poor US ADP jobs report which came in at +139K (Feb) vs +159K expected. Analysts point out that this does not bode well for the big data event of the week - the US Non Farm payrolls. No doubt predictions for the report will be lowered from here and this should keep dollar strength contained.
However, it was the release of UK data that really saw the GBP find support; a positive Services PMI reading was issued at 09:30 that saw a figure of 58.2 beat expectations for 58.
The USD could well claw back ground in coming sessions. With equity markets coming under selling pressure through the day we note the broader US dollar exchange rate complex managed to find a bid.
Analyst Jean-Pierre Doré at Western Union notes that the Crimean issue has not been resolved, a point that continues to create a lot of indecision, "and thus reason for traders to err of the side of caution, which is fuelling a slight broader USD rally as we await clarity. In times of geo-political re-balancing and the resulting indecision the USD, JPY and CHF will always find favour."
Bank of America warn GBP-USD is due a fall
Today we hear from Bank of America Merrill Lynch who have the following warning for the GBP-USD:
"GBP/USD is elevated at current levels and at risk of a correction lower. We recommend positioning for a sell-off in GBP/USD, now that the GBP supportive M&A order flow (from the Vodafone-Verizon deal) has passed through the market. Our proprietary positioning indicators highlight that equity and bond investors are holding a very overweight sterling exposure.
"This elevated position is now consistent with turning points lower in positioning and therefore asymmetrically skews risk reward toward a weaker currency."
Pound dollar exchange rate upside attempt fails
Turning to the outlook for Cable, the team at ICN Financial point out that the GBP-USD too is failing to rediscover upside momentum:
"All the bullish attempts yesterday failed to take the pair to trade above 1.6775 and resistance level 1.6740 was stable in front of the bullish attempts then the pair dropped again below the Linear Regression Indicator 55 as showing on graph. Stability below Linear Regression Indicator 34 and 55 is negative, meanwhile breaking 1.6600 confirms bearishness and cancels positivity showing on AROON Indicator.
"MACD is currently showing negative signals, therefore we prefer to remain neutral today waiting for an intraday technical signal or for the pair to trade between 1.6600 - 1.6740."
Euro dollar exchange rate technicals suggest further downside
The euro dollar (EUR-USD) is meanwhile tipped to fall further with a bearish technical setup being witnessed in the near term.
Fawad Razaqzada at Forex.com paints a vivid picture on the euro dollar exchange rate's current technical setup:
"The EUR/USD formed a classic bearish inside bar pattern on its daily chart on Monday. This candlestick formation occurs when the entire range of price action falls within the range of the previous session, in this case Friday.
"It is also called “Harami,” which is a Japanese word for pregnancy. So, metaphorically, the EUR/USD may be ‘pregnant’ and weighed down by the ‘unborn baby’. But will it be a ‘miscarriage’ this time around?"
Outlook for US dollar exchange rate complex relies on US economy once more
As long as the situation does not worsen in the Ukraine over the next 24 hours, investors will start to shift their focus to the outlook for the US labour market.
Non-farm payrolls are scheduled for release on Friday and tomorrow the ADP and non-manufacturing ISM reports are scheduled for release - 2 very important leading indicators for NFPs that will help set expectations for the key report.
The Federal Reserve will also release the Beige Book, which provides a written insight into labor market and general economic conditions across the nation.
"This report along with this week's economic releases are extremely important inputs for the Federal Reserve who is preparing to make significant changes to forward guidance later this month," says Kathy Lien at BK Asset Management.
