Pound Dollar on Course for a Fall Below 1.5 as USD Ploughs Ahead

The pound to dollar exchange rate (GBPUSD) is forecast to test the 1.4953 January low as markets were shown to have mispriced the dollar’s upside potential ahead of a recent key economic data release.

• “The focus is now on the 1.4953 January low. Key support remains the 1.4910/1.4813” – Karen Jones at Commerzbank.
• “The upside target is $1.51, and beyond that traders will look to the 50-hour moving average of $1.5160.” - David Madden at IG.

America’s dominant dollar soared to new multiyear highs as market confidence grows in a Federal Reserve interest rate hike this year.

Currency markets reacted to the impressive positive sides of the US payrolls released at the end of the previous week and ignored any parts of the softer data - we see momentum running into the second week of March.

US yields moved sharply higher following the data taking the USD alongside; it is a case of both currencies and rates driving each other forward.

“It looks like we underestimated the USD’s power, thinking a lot was priced in, and seems we are moving into a new trend dynamic. As such pullbacks in the USD should remain muted before pushing to new highs against most of its trading partners,” say Lloyds Bank in a currency note to clients at the start of the new week.

At the time of writing we see the British pound to dollar exchange rate trading 0.48 pct lower. 1 GBP = 1.5057 USD.

The euro to dollar exchange rate (EUR/USD) is 0.12 pct higher, 1 EUR = 1.0853 USD.

Keep in mind that the above quotes are representative of the wholesale markets - your bank will affix a spread to the rates at their own discretion when conducting your international payments. However, independent providers are able to get closer to the market rate, thereby delivering up to 5% more currency in some instances.

Predictions for the GBPUSD

GBP/USD came under strong downside pressure last week.

“The focus is now on the 1.4953 January low. Key support remains the 1.4910/1.4813, a long term Fibonacci retracement and the 2013 low,” says Karen Jones at Commerzbank.

Jones says longer term this is expected to act as the break down point to 1.4291/29, the 78.6% retracement of the move from 2009 and the 2010 low.

“The Elliott wave count on the daily chart is suggesting that 1.5550 was the end of the short term correction higher and we continue to view this as an interim peak. Intraday rallies are expected to remain capped circa 1.5130/1.5225,” says Jones.

However, at the start of the new week buying interest in the British pound is apparent, indeed the broader USD complex is soft.

David Madden at IG says the current recovery in GBPUSD could run further yet:

“GBP/USD is still in last week’s downward trend with the first downside target at $1.50, and if that level is punctured it will bring $1.4970 into sight. The upside target is $1.51, and beyond that traders will look to the 50-hour moving average of $1.5160.”

GBP: Don’t Forget the Politics

Dollar strength aside, Jim Langlands at ForexTell says political uncertainty will become more of a drag for the GBP:

“Sterling will not be helped in the weeks ahead either, by the concerns over the chances of a hung Parliament at the May 6 election or the possibility of a UK exit from the EU if there is a referendum once the next parliament is elected.

“The Tories need an outright win in order to deliver PM Cameron’s promised referendum, although the polls do not suggest that this is likely to happen and that UKIP could well hold the balance of power, with seats also going to the SNP and the Greens.

“Meanwhile, in the next few days, Cable is likely to be driven by offshore leads given the comparative lack of domestic UK data this week.”

Technically speaking, Langlands notes that GBP/USD took out most of the interim support levels on Friday but has managed to hang on to 1.5000, a break of which would send it to the minor double bottom (31 Jan/3 Feb) at 1.4987 and then to the previous trend low of 1.4951 (23 Jan).

“A break of this would then head to the import Fibo support at 1.4918 (61.8% of 1.3502/1.7191) which should hold it for a while, but below which would want to take a look at the July 2013 low at 1.4813. The base of the channel is at 1.4600 and given the look of the daily indicators it seems to be a realistic target.”

On the topside, which is relevant to us at this juncture, the first bout of resistance is seen at the Fibo resistance at 1.5152 (23.6% of 1.5551/1.5031), although 1.5100 will see interim sellers.

“Beyond 1.5150, Friday’s high was at 1.5254 and I guess that we could at some stage want to revisit this area, although it seems a very long way off now,” says Langlands.