Pound Fights to Keep 2015 Uptrend Against the US Dollar Alive

The recovery in the British pound to dollar exchange rate (GBPUSD) is seen on a knife-edge as we head into the new month.

“Only a decisive break above 1.5552 would constitute a game change in favour of a much broader recovery” – JPMorgan.

The 2015 recovery rally was given a rude shake-up on Thursday following the release of stronger-than-expected inflation data in the United States.

The slump led some to suggest that the period of GBP strength had finally reached its limit and a continuation of the longer-term downtrend was about to establish itself once more.

However, at the time of writing we see sterling is desperately holding its ground with 1.54 being the support zone. Note that this area forms the base of the upward channel - something that will not be lost on those bulls who will be entering the recovery story at discounted levels.

• The pound to dollar exchange rate is quoted at 1.5445.
• The euro to dollar rate is meanwhile defending the 1.12 level, it appears downside pressures on the shared currency are growing once more.

Be aware: The above quotes are from the wholesale markets. Your bank will affix a spread at their discretion when passing on currency. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Find out more.

Data You Should be Aware of

The USD tripped early in the final session of the month when it was reported year-on-year GDP growth in the US read at 2.2%. While still ahead of the 2.1% forecast by analysts it was down from the 2.6% previously released.

“Growth is certainly more sluggish than it was at the end of last year, but the US economy is still a shining beacon compared with other developed economies,” says Dennis de Jong, managing director at UFX.com.

“There has been some slightly disappointing data this week and the Fed will be eager to see things pick up over the next few months. However, the oil crisis will continue to play havoc with the markets and the global economy remains in a precarious situation.” 

Nevertheless, the Outlook Remains Bullish for the US Dollar

This week we have seen US Federal Reserve Chair Yellen make her best efforts to dampen market enthusiasm for early rate hikes by dropping “patience” from her communications on the interest rate outlook.

The dollar fell as markets got the hint that the Fed would use low inflation as an excuse to push back the date on the first interest rate rises.

Then came news inflation is not as soft as many had been expecting.

“Most had inked into their minds a poor inflation print and wanted to resell rates and buy the USD at better levels. It was not to be as they flooded back in and both moved sharply, with equities also benefitting,” say Lloyds Bank Research.

Lloyds are not willing to call the end to the phase of USD strength, “as it is clear only truly awful data has the ability to reverse this market.”

That said, there are those in the market that think further USD weakness could lie ahead in the near-term.

In their latest currency forecast note analysts at TD Securities say the potential for further consolidation in the dollar exchange rate family could run further:

“We remain broadly bullish on USD but the sharp rally in the DXY is looking somewhat stretched and the recent consolidation in USD may extend for a few more weeks.”

This would allow the recovery rally in GBP to extend a little further.

Technical Analysts Get Cold Feet on Pound Sterling’s Rally

What are the analysts saying about the prospects of further GBP strength against the US dollar?

Karen Jones at Commerzbank has been tracking the trend higher in GBPUSD over recent days:

“GBP/USD has seen interesting price action.

“Yesterday was a key day reversal and this calls into question the recent break higher and in fact suggests that the market has topped at 1.5550. The market has not traded above its cloud since July 2014 and we suspect that this has been a false break.

“The Elliott wave count on the daily chart is suggesting this was the end of the short term correction higher however a break below the 20 day ma at 1.5333 will still be needed to alleviate upside pressure. This will retarget 1.5197 en route to 1.4953 the January low.”

JP Morgan’s tech team says the USD is likely to get the better of the pound unless a decisive break higher occurs:

“Having reached the projected wave 4 target at 1.5552 (int. 38.2 %) this market is offering a very good risk reward to bet on a still missing 5th wave decline which would most likely retest the 2013 low at 1.4813 if not the lower support zone between 1.4339 and 1.4228 (76.4 % on highest scale/2010 low).

“Only a decisive break above 1.5552 would constitute a game change in favour of a much broader recovery in which daily Ichimoku-resistance at 1.5884 for the lagging line might only be a minimum target.”