Pound Dollar Under Heavy Selling Pressure But Speculators Will Sniff a Buying Opportunity

It all started going wrong for those betting on a stronger pound sterling back in July - it was at this time that the tide began to turn in favour of the US dollar.

The US dollar has since put in one of its most spectacular runs since it was unhitched from the gold standard in the 1970's.

However, there is a growing sense that it is time for a GBP recovery as the climbing dollar must surely run out of energy.

Near-Term Pressures on GBP/USD

Sterling weakened by over a cent against both the euro and the US dollar as markets reacted negatively to this morning’s Bank of England Inflation Report.

"The problem is that inflation looks set to fall further which reduces the likelihood of increasing UK interest rates. This added to Mark Carney also cutting the UK’s economic growth forecast to 2.9% for 2015, which has also added to the negative sentiment towards the Pound moving forwards," says Charles Purdy at Smart Currency Exchange.

• At the time of writing the pound to dollar exchange rate conversion (GBP/USD) is seen trading at 1.5770.
• The pound to euro exchange rate is 0.45 pct lower at 1.2650.

Please note that the above quotes will be subject to a discretionary spread by your bank, it can vary wildly from the market rate. If you are looking to make international payments we suggest being quoted by an independent provider. By tapping the wholesale markets they can offer up to 5% more currency in some instances.

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An Oversold Pound?

A look at the charts shows the Relative Strength Index (RSI) for the GBP/USD pair is at 24. The RSI is used to indicate whether a financial product is oversold or overbought on the markets. 50 is neutral while 30 indicates oversold while 70 is considered to be overbought.

The idea is that the products are always prone to levitate around neutral and extreme readings must correct. A reading of 24 on the weekly charts is certainly over-bought. However, the timing of a correction is notoriously hard to call.

From a fundamental perspective we hear from Lloyds Bank Research who reckon the most recent sell-off in GBP is overdone:

"We view the market reaction to the QIR as exaggerated. There was little in the report that justifies pushing rate hike expectations further out. The OIS curve suggests the first rate hike is now fully priced by November 2015; which differs from the market implied rate expectation used for the Bank’s projections.

"We see potential for a turnaround in the re-pricing of rate expectations suggesting scope for a modest recovery in GBP. However, with sentiment towards GBP still, we may need a positive trigger to prompt a rebound."

The Negative Catalysts for GBP/USD

The sterling dollar rate has fallen in the wake of the release of the Bank of England’s November inflation report.

Governor Mark Carney said he did not expect inflation to reach the targeted rate of 2% for three years.

The Bank also cut its prediction for UK economic growth in 2015 to 2.9%.

That said, the Bank said it expected average salaries to be growing by 2% by the end of 2015.

Importantly, Carney gave no indication that the Bank had a date in mind for the first interest rate rise. Had he been a little more forthcoming we expect sterling would have rallied.

In the void, the pound has fallen.

Is it time to Bet on the Pound Again?

We hear from a number of analysts as to where the sterling dollar rate could be headed next.

Sean Lee at Forextell says he may be tempted to back the GBP again:

"My best trade of the year by a long way was my long cable trade and I’m willing to start dipping my toes back in this water on any dips back towards strong technical support around 1.5720.

"EUR/GBP is consolidating near its recent lows and still looking heavy whilst GBP/JPY has caught an updraught in recent weeks; any rally in the cable will need a buoyant GBP on the crosses."

Luc Luyet at Swissquote Research says watch out for the longer-term trend:

"GBP/USD remains in a succession of lower highs and lower lows. Hourly resistances can be found at 1.5918 (10/11/2014 high) and 1.6002 (06/11/2014 high). An hourly support lies at 1.5791 (07/11/2014 low). Another support stands at 1.5718 (21/08/2013 high).

In the longer term, the break of the support at 1.5855 (12/11/2013 low) confirms an underlying bearish trend. Next supports can be found at 1.5718 (21/08/2013 high) and 1.5423 (14/08/2013 low). The long-term technical structure remains negative as long as prices remain below the resistance at 1.6227 (09/10/2014 high)."

Karen Jones at Commerzbank tells us any buying of the USD must be small:

"GBP/USD has old off to and is bouncing from the 1.5781 38.2% retracement of the move from 2008. The new low (1.5792) has not been confirmed by the daily or weekly RSI, which has diverged and we are concerned that we will see a retracement ahead of any further weakness.

"Rallies are expected to find good resistance offered by the 1.6047 4 month downtrend. Key resistance remains at 1.6185 and while capped here a negative bias remains intact.

"Current trade: Shorts from 1.5910 exited 1.5906 Recommended Trade: Attempt tiny longs 1.5800 – stop 1.5780 and exit 1.6000."

Bill McNamara at Charles Stanley takes a longer-term view and sees 1.57 looming:

Although it had started to look like sterling might be finding some support at around 1.60 its latest price action suggests that this weak spell is not over yet and that, in fact, it might have further to go.

Last week’s 0.78% decline took the UK currency to its lowest reading against the dollar in more than a year and the chart is pointing towards a near-term target of around 1.57 before it finds further support.