GBP/USD X-Rate: Chase the Rebound

GBP/USD strength is projected to extend near-term by Morgan Stanley but a resumption of heavy selling pressures is ultimately forecast for subsequent months.

The GBP/USD exchange rate’s October-November advance is not done yet say strategists at Morgan Stanley.

The call comes as the Pound slides back from the resistance seen at $1.25 and back towards the middle of its wider 1.2080-1.2675 post ‘flash crash’ consolidation region.

The Pound has come under pressure against the US Dollar as US treasury yields continue to rise and pull up the Dollar alongside.

In fact, the rise in yields’s since the Trump victory have helped pull the Dollar index - a basket of the major Dollar pairs - to its highest level in 14 years.

The EUR/USD is the main constituent of the Dollar index and the fall towards multi-month lows in this exchange rate have been instrumental in the Dollar index’s move higher.

Yet, GBP/USD manages to hold its own and we have noted here that there remains the possibility that the multi-week rally extends further.

And it’s not just us who see Sterling heading higher.

“We see the GBP maintaining its near-term outperformance in the broad USD rally,” say Morgan Stanley in a recent client briefing.

GBP/USD Rally to Give Way to Deeper Decline

How long can Sterling resist the USD juggernaut though?

For a little longer argue Morgan Stanley who say the exchange rate has the potential to rebound to 1.30 in the near term.

“PM May's speech on Monday was focused on UK businesses. The market is still short GBP so positioning adjustment and no new negative news from the Brexit negotiations should continue to allow GBP to rebound.

However, going into 2017, Morgan Stanley say GBP may weaken again as we expect business investment to fall.

“The market is still short GBP so position adjustment and no new negative news from the Brexit negotiations should continue to allow GBP to rebound. We have a tactical target of 1.29 for GBPUSD,” say Morgan Stanley.

Yet, official forecasts from the bank’s economists show the GBP/USD is forecast at 1.21 by year-end.

The pair is forecast down to 1.15 by the first quarter of 2017 from where it will gradually recover to 1.22 by the end of 2017.

So the message is we should expect the Brexit sell-off to ultimately resume after this, admittedly unexpected, hiatus.

It is also worth pointing out that from a techical perspective further losses are anticipated.

Technical analyst Robin Wilkin at Lloyds Bank believes the long-term bear run is not done.

In a note to clients he says:

"Having rallied up to, and failed at, resistance near 1.25 yesterday, our bias is for the pair to trade back towards the middle of the range and re-test the 1.2330/00 support.

"Long term, we see a greater risk of another downside test, but that should complete the bear cycle we have been in from the 2007 highs at 2.1160."

However, an exciting observation - for the bulls amongst you - is made by Wilkin that a major base is then expected to develop for an, "ultra-long term move towards 1.55-1.70 region."

Time for the US Dollar to Correct Lower

The Dollar can't keep climbing indefinitely - this we know. The trick is calling the top.

With this in mind consider the following observations made by Steve Jarvis, chief technical analyst for TraderMade, the FX charting, data and technical analysis provider.

Jarvis has looked at USD behavior two months before and after every election since 1988.

He notes:

"The US Dollar is now in an uptrend against all other major currencies. However, it is overbought and starting to look at risk of a setback to partially unwind it's recent advance, before possibly being set to head higher still towards year-end.

"On 5 out of 7 past elections since 1988, the US Dollar formed a key turning point around 2-3 weeks after the US election (approximately the time frame we are in now). On the other 2 occasions it underwent a short-lived corrective phase, before extending its post-Election trend.

"This year's price action is uncannily similar to those of 2000 and 2008. The major differences are that after the 2000 and 2008 elections, USD did not break pre-election highs, going on to form a top pattern which lead to significant reversal pattern being completed, triggering a bearish phase for the US Dollar."