Pound-Dollar Exchange Rate Outlook Remains Positive According to Leading Technical Analyst

Modified: Thursday, 02 January 2020 12:22 GMT

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- Technical setup advocates for GBP/USD gains

- Solid gains at year-end help buoy GBP sentiment

- Fundamental questions on trade talks to hamper Sterling's potential

The British Pound is tipped to retain a positive bias against the U.S. Dollar for the foreseeable future, according to a leading technical analyst.

Karen Jones, Head of FICC Technical Analysis at Commerzbank in London, says "GBP/USD’s outlook is positive. At the end of last year it reacted back to and recovered from the 55 day ma at 1.2977 currently. The low on the 23rd December was 1.2908 and while above here we will assume an upside bias to retest the December high at 1.3515."

At the time of writing the Pound-to-Dollar exchange rate is quoted at 1.3208.

GBP/USD hit a multi-month high at 1.3515 on the night of the UK election, but has since consolidated below here. "Very near term the market has halted at a minor 61.8% retracement at 1.3283 and we would allow for a near term retracement towards 1.30ish," says Jones.

The second half of December saw some broad-based declines in Sterling, however the currency has clawed back some ground with a particularly strong gain being put in over the course of the turn of the year.

The solid gains and exit from the late-December downtrend understandably lends itself to an ongoing constructive stance on GBP/USD amongst the trading community.

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While the technical setup underpinning Sterling remains constructive, at least according to analysis from Jones, the fundamentals facing Sterling could ultimately turn into a headwind as market focus turns to the issue of EU-UK trade negotiations. The Pound rallied into year-end as markets saw a solid Conservative win in the General Election as ridding the UK's economic outlook of significant political uncertainty. But, while some uncertainty has been wiped away, there nevertheless remains a good does of questions concerning the outlook.

"GBP/USD has drifted back about the 1.32 level. UK/EU trade talks will only start after the UK has left the EU on January 31, the pace and tone of these talk will set the tone for the Pound into the spring," says Jane Foley, Head of FX Strategy at Rabobank. "In contrast to PM Johnson’s confidence that a trade deal between the UK and the EU can be completed by the end of this year, recent comments from EU Commission President suggest an extension may be needed. Since the PM has ruled out a delay, the possibility of a cliff edge Brexit remains a threat."

Sterling dislikes uncertainty, and tough negotiations on the future trading relationship between the EU and UK will likely dictate direction for Sterling in 2020.

The end-2020 deadline for a new trade deal to be reached by the EU and UK has been hardcoded into UK law, and therefore makes the prospect of extending the deadline for a trade deal to be agreed a very difficult prospect for the Prime Minister. "GBP/USD fell back towards 1.2900 shortly after the UK general election results because Johnson’s government ruled out any extension to the transition period beyond 2020. The transition period lasts at a minimum until 31 December 2020. During the transition period, the UK and EU will try to hammer‑out their future trade relationship," says Elias Haddad, a foreign exchange strategist with CBA.

However, we would be wary of drawing direct comparisons between the recent EU withdrawal negotiations - which provided significant anxiety for currency markets - with future trade negotiations. The withdrawal negotiations and trade talks are understandably two different beasts.

We therefore question what a 'cliff edge' at the end of 2020 will look like as negotiators are yet to structure negotiations and therefore attach various outcomes to the process. We are therefore sceptical of the use of the term 'cliff edge' by some financial commentators.

Regardless, there is a degree of uncertainty on the matter, and uncertainty is all that is required to keep a lid on Sterling until such a time as the nature and structure of trade talks are revealed.