GBP/USD Outlook: Further Strength Ahead of a Capitulation

The Pound's relief rally against the US Dollar should be viewed as a near-term event argue a number of analysts who give us the targets that are feasible ahead of the next major move lower. 

The outlook for GBP/USD has turned bullish this week and the pair has enjoyed its strongest run since early September.

At the time of writing the pair is at 1.2234 and Ipek Ozkardeskaya at London Capital Group is looking for a successful attempt above the 1.2295/1.2325 resistance area to pave the way towards 1.2440. 

This would represent a half-way recovery of the decline from the September 29th high to October 7th flash-crash.

Also eyeing further strength is Richard Perry at Hantec Markets. However, Perry cautions that strength should remain limited:

“With the selling pressure having abated for now, Cable has turned into a range play.

“The hourly chart shows that the trend lower has been broken and a move above $1.2270 resistance yesterday improved the outlook.”

According to Perry the bulls will now be eying the resistance at $1.2330 which held yesterday and forms the neckline of a near term base pattern.

A decisive break would imply around 200 pips of further recovery.

“I have been looking at the role the 55 hour moving average (c. $1.2227) has played in recent weeks and this has become a key gauge for the hourly chart, so watch this as a basis of support now,” says Perry.

Above: GBP/USD hourly courtesy of Hantec Markets.

Strategists at Morgan Stanley meanwhile argue GBP/USD has the potential to rise to 1.2650, "but investors may soon have to deal with increasing uncertainties again."

But, the fundamental backdrop surrounding the Brexit process has the bank believing GBP/USD near 1.2650 offers a selling opportunity, "targeting 1.15 which we think may be reached in Q1."

Their bearish GBP/USD call should be supported by the anticipated rise of the USD too.

The call echoes that held by Goldman Sachs who suggest here that the near-term strength will give way to a final leg lower.

Analysts at Lloyds Bank agree. In a note to clients technical analyst Robin Wilkin says:

"Longer-term, the drop to 1.1491 suggests that the decline from the ~1.72 highs set back in 2014 is ongoing and still risks another move lower before a more significant base develops. Medium term, we are expecting a wide range to develop first."

However, like his peers at Hantec and London Capital Group Wilkin does note further near-term upside as being possible:

"Intra-day pivot support lies in the 1.2225 region, with 1.2150-1.2090 range lows below. A push up through that resistance sees little in the way of resistance till the 1.2455-1.2515, Fibonacci and daily trend resistance zone."

And just to hammer the point home, CitiFX are also anticipating further strength ahead of a capitulation. 

Citi say the rebound could extend into the 1.25-26 area but should be capped there:

"Given the robustness of UK data this week that sees both the Citi’s UK Economic Surprise Index and market expectations of longer term UK inflation rising very sharply, the short covering bounce in GBPUSD this week may have further to run with a break of 1.2360-70 taking the unit potentially as far as the 1.25-1.26 relief rally area.

"However, at that level, the huge Brexit risk premium is likely to bring the sellers back as they see it potentially providing a major entry point to re-establish shorts to target 1.2120-00 and possibly the 1.1800 handle."