The US Dollar's Strength Continues Driving GBP/USD Lower
The Dollar is poised to continue rising versus the Pound which is likely to remain 'on hold’ during deliberations over the legality of Brexit, with a decision not expected until January.
Three leading technical analysts, Commerzbank’s Karen Jones, Hantec’s Richard Perry and Scotiabank’s Shaun Osborne are bearish GBP/USD, saying a break below support in the 1.23s would confirm a continuation into a support zone between 1.20-1.21.
The pair has probably reversed the short-term trend from up to down which is further supporting a bearish outlook.
The progression of peaks and troughs, for example, has arguably rotated and is now down.
A break below 1.2200 would confirm an extension of the downtrend to 1.2100.
Supporting a bearish view is the MACD, which is crossing its signal line and is providing a bearish signal.
Analysts at J.P. Morgan forecast a resumption of the downtrend in a final Elliot wave 5 lower, which may now be beginning.
Wave 5’s are the final waves in larger impulse moves in line with the longer-term trend.
In October, they predicted a corrective wave 4 would rise to the 1.2650-1.2800 zone, and this appears to have happened.
It is possible that it is now time for wave 5 to move down to around the flash crash lows at 1.1450, assuming their analysis is correct.
US Dollar Outlook Very Positive
The bearish technical picture supports a very optimistic market consensus about the Dollar.
The advisory service Capital Economics are exceptionally positive about the currency.
“There is likely to be a much greater contrast in monetary policy between the US and other advanced economies than most anticipate over the next two years.
“We expect the Fed to hike interest rates four times in both 2017 and 2018. And for all the talk of the end of quantitative easing, the ECB and Bank of Japan look set to continue their asset purchases for the foreseeable future.
“In turn, this divergence is likely to put additional upward pressure on the dollar in 2017.”
There will probably also be a sharp divergence between US and UK monetary policy.
The Bank of England (BOE) is currently in ‘neutral’ but if the economy starts to show signs of weakness, it is at risk of turning the faucets of money supply back on, lowering rates and weakening the Pound.
UK GDP Data Boosts Sterling
The Pound rebounded on the morning of Friday, December 23 after UK Q3 GDP was revised up to 0.6% quarter-on-quarter from 0.5% previously.
The year-on-year result was revised down to 2.2% from 2.3% previously, but this did not prevent Sterling from appreciating due to the higher quarterly result.
The data reinforces the UK economy's remarkable resilience in the face of the uncertainties posed by Brexit and is likely to support the outlook for the Pound.
US Treasuries Expected to Fall
US bonds are expected to fall in price, say Capital Economics, due to increased supply.
This is likely to help the Dollar as a fall in prices will push up yields which are inversely correlated to prices.
“Treasury yields are also set to climb further, particularly at a time when the supply of US government bonds is set to increase markedly and demand from key buyers, notably China, is waning,” said Capital.
China is the single biggest owner of US Treasury bills, so it could manipulate yields if it so wished.
There is a risk that if China US relations get worse the Chinese could threaten dump all billions of US treasury debt they own, leading to a spike higher in the the near-term.
