The Pound vs Dollar: Flash-Crash Lows Next Predict Citi, Credit Suisse

Analysts at Citi - the world’s largest foreign exchange dealer - have confirmed to clients they are bearish on the Pound-Dollar exchange rate.

In a communication released on Tuesday January 10, technical strategists have communicated expectations for further falls thanks to renewed hard-Brexit risks.

“We expect a transition period with continued Single Market access but only limited immigration restrictions. However, PM May may take the UK out of the Single Market eventually,” says a note to clients seen by Pound Sterling Live.

We see this likelihood as having been heightened on Tuesday on the basis that leader of the official opposition - Jeremy Corbyn - has signalled his party’s willingness for the UK to control EU immigration.

This suggests the UK Parliament will not provide the resistance to the Government’s desired negotiating position that was once assumed.

It also makes the impending Supreme Court ruling on whether or not Parliament should have a say on triggering Article 50 a damp squib.

There are other reasons to be negative on Sterling-Dollar though argue Citi:

“The economy’s resilience may be tested by inflation rising above wage growth, with limited space for consumers to reduce savings or increase borrowing much further.”

So far there appears very little concern amongst consumers towards inflation with latest Christmas trading figures from Morrisons confirming consumers are not afraid to open their wallets six months after the Brexit vote.

Citi currently expect UK GDP to grow by 1.4% in 2017, following 2.0% in 2016.

From a technical perspective Citi argue that the Pound will likely head back to its flash-crash lows:

“With RSI trending down, GBP/USD may fall toward 1.1841, with resistance at 1.2591.”

1.1841 is seen as a solid support zone based on technical analysis conducted by the bank.

Resistance to any strength is meanwhile seen at 1.2691.

However, official Citi forecasts for the GBP/USD on a 0-3 month timeframe place the exchange rate at 1.24 and at 1.14 in 6012 months.

These official forecasts are derived from a range of studies conducted across the research offering at Citi.

Credit Suisse Also Eyeing Flash-Crash Low

Latest estimates for the direction in the Pound to Dollar exchange rate from Credit Suisse are also eyeing the flash-crash lows.

In a technical briefing to clients Credit Suisse say, "below 1.2083 can establish a larger top for 1.2000/1.1982, then the 1.1491 spike low."

Not though - the flash-crash lows on Citi's charts differ greatly from the flash-crash lows on Credit Suisse's charts.

This is because various data providers gave different values for the low.

This obviously creates a major level of uncertainty on this front - who is in fact right - will the GBP/USD finally confirm who is right by settling at the actual low?

This makes for an intriguing play.

Nearer-term, Credit Suisse add:

"GBPUSD has extended its sell-off from last week to break below the 1.2199 recent low to test the 50% retracement of nthe October/December rise at 1.2133. Although this is essentially holding, we stay bearish below here to test more important price support seen at 1.2083. We would expect this level to hold at first, but beneath it can set a bigger top for 1.2000/1982 – the 61.8% retracement level – next.

"Capitulation beneath here can then turn the spotlight back to 1.1855, then the October 2016 1.1491 spike low.

"Resistance moves to 1.2198/2200 initially, then 1.2306/15 with 1.2414/33 expected to cap. Strategy: Flat. Sell at 1.2240/80, stop above 1.2310, for 1.2085."