Pound-Dollar Charts Tip Struggle Above 1.38 as Enthusiasm Fades Among Analysts

- GBP/USD little changed for week on Friday
- After attempt on 1.39 ends in tears for GBP
- Tipped to struggle above 1.38 in short-term
- Analysts’ enthusiasm for GBP/USD fading
- As Fed policy decision looms ahead of BoE

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• GBP/USD reference rates at publication:
• Spot: 1.3770
• Bank transfers (indicative guide): 1.3390-1.3485
• Money transfer specialist rates (indicative): 1.3650-1.3700
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The Pound-to-Dollar rate was little changed for the week on Friday after an early doors rally to July highs ended in upset for Sterling, although price action has since led analysts to warn that GBP/USD could struggle to sustain any further climb above 1.38 in next week’s trading.

Sterling was lower by -0.12% when trading at 1.3777 against the Dollar on Friday and had ebbed by around -0.23% for the week overall after a strong Monday rally up to 1.3913 was followed by a sharp reversal back near to 1.3800 on the day.

The Pound-Dollar had since then traded in a narrow range between 1.38 and 1.3850 before suffering heavy losses on Thursday when the release of U.S. retail sales figures for August saw the Dollar surge across the board before gains slowed in the Friday session.

Many economists expected Thursday’s retail sales numbers to reveal slight declines in spending for last month so the actual data shocked markets when it emerged that unsated consumer appetite for goods had lifted sales by 1.8% for the period even after spending on cars was excluded from the data.

“GBP/USD dived lower yesterday and has seen a slight erosion of a near term support line,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: GBP/USD chart and partial snapshot of Commerzbank’s technical analysis.

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“It is in the middle of a range. Immediate resistances are one month highs at 1.3893/1.3914 ahead of the more important 1.3984/1.4018 medium term pivot, where we suspect that the market will fail,” Jones told clients on Friday.

Jones and the Commerzbank team have flagged the 1.3734 area as a likely site of technical support for the Pound-Dollar rate and have flagged the areas around 1.39 and 1.40 as likely to resist any further attempted recoveries by Sterling.

They haven’t ruled out the Pound rising above 1.39 and going on to test 1.40 in the days and weeks ahead, although others have become doubtful that Sterling will be able to sustain itself above 1.38 due to current and recent momentum, which has been weak since Monday.

“Short-lived swings above the mid-1.38 zone suggest limited upward pressure in the GBP to extend its gains since Aug 20, and its 100-day MA at 1.3914 follows closely after the figure as resistance,” says Juan Manuel Herrera, a strategist at Scotiabank.

It didn’t help the Pound-Dollar rate on Friday or any other Sterling pair that August’s UK retail sales figures missed market expectations by a country mile and were accompanied by an upward revision to the size of the even larger contraction reported for July.

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“For now, GBP is the overnight laggard rather than materially weaker,” says Daragh Maher, head of FX strategy, U.S. at HSBC. “The fact that GBP-USD is basically flat rather than materially lower shows some ambiguity about what drove the data miss.”

Recent strength in UK retail spending had been widely expected to fade in the months after the services side of the economy was allowed to reopen from its latest round of government closures, as some spending shifted from mainly-online goods purchases back to other areas.

But whether this or something more malign was behind July and August’s declines is now a matter of debate among economists.

“We are not in the business of forecasting inflation (or wages), but the balance of risks for the UK economy are currently tilted in the direction of price pressures climbing further, and persisting for longer than previously thought,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets, who sees goods price inflation as likely to explain at least a portion of August’s retail sales decline.

“We recognize that inflation and wage pressures rising faster than productivity growth is not a good medium-term fundamental for a currency or the BoP. But we also expect the aforementioned backdrop to continue figuring directly into the BoE's evolving monetary policy stance — so we think GBP pullbacks along the axes in question should ultimately be faded,” Gallo says.

Above: Pound-Dollar rate shown at daily intervals with major moving-averages and Fibonacci retracements of June decline. Sterling trades back beneath its 200-day moving-average at 1.3835 after failing to overcome resistances above 1.39 comprising its 100-day moving-average at 1.3910 and the 50% Fibonacci retracement of June’s corrective fall.

Friday’s data and price action came days away from next Wednesday and Thursday monetary policy decisions of the Federal Reserve (Fed) and Bank of England (BoE), which will be instructive of the outlook for both Sterling and the U.S. Dollar.

It also follows Wednesday’s release of inflation figures for August that showed UK price growth rising to 3.2%, which was its strongest level since November 2017 when the consumer price index peaked at 3.1% due to the inflationary impact of Brexit-related currency depreciation.

“We think scope for upside is limited and constrained. Limited because the BOE is likely to refrain from making material changes at a non-forecast meeting; constrained because the decision will follow the Fed meeting,” says Mazen Issa, a senior FX strategist at TD Securities.

Previously in September Bank of England Governor Andrew Bailey and colleagues told parliament’s Inflation Report hearing that inflation could rise further to 4% or more later this year and that increases in Bank Rate, currently 0.10%, could be necessary to reign it in over the coming years.

That was effectively a repeat of the message contained in August’s policy decision and the quarterly inflation report, which has been a source of support or the Pound, although Federal Reserve policy and its impact on the Dollar will also be in the mix for GBP/USD too in the coming week.

“While we track a modest 1% discount for cable on our cross-asset FV gauge, it does not strike us as sufficiently appealing to make the gamble against the USD with a hawkish risk at the Fed meeting,” TD’s Issa wrote in a Friday note.

Above: Pound-Dollar rate shown at weekly intervals with major-moving averages and U.S. Dollar Index.