The GBP/USD X-Rate in Strong Recovery - Where Next?

Pound Sterling has defended a key resistance point against the US Dollar over the past 24 hours and we could therefore see downward pressures start to ease on the GBP/USD conversion.

We have seen GBP/USD plug a 31-year low already this week having reached 1.2037 on Wednesday, only to witness the exchange rate recover to as high as 1.23 in subsequent hours. 

The conversion is now at 1.2250.

The recovery move has little to do with the Pound and everything to do with a broad-based US Dollar sell-off. 

The Dollar has come under notable pressure following a much-anticipated Donald Trump press conference.

GBP/USD's ability to recover is important as it failed to make a daily close below the support line at 1.2160 once again. 

This confirms the long-term floor for the exchange rate remains intact.

This should seel Sterling supported in the near-term.

Temporary End to the Dollar's Impressive Rally

The Dollar fell after President-Elect Donald Trump gave little new information on his economic plans at a press conference that was more focussed on his dealings with Russia, his personal life and his business empire than anything else. 

What the Dollar needed was some solid information regarding his future plans to stay propped up.

"Sterling touched the lowest level against the US dollar since October’s ‘flash crash’, although this was driven by general dollar strength leading up to Donald Trump’s news conference. The US Dollar has subsequently pared gains, falling against all major currencies, as Mr Trump gave little away on anticipated fiscal plans. More policy details may be forthcoming in his inauguration speech on 20 January," says a note from Lloyds Bank Commercial Banking seen by Pound Sterling Live.

Ross Burland at FXStreet notes there was nothing to support the Dollar other than "everything is going to be great, the best, amazing".

"We need fundamental fiscal plans now from Trump, not presidential-rally-style hype," says Burland.

Senior Currency Strategist at RBC Capital Markets, Lisa Lignos, says the move lower in the Dollar could also have a lot to do with positioning.

After all, the market is so one-sidedly bullish on the Greenback at the start of 2017 that any reversals could be massive.

"There was no single fundamental driver to rationalise the USD move; the Trump press conference disappointed those hoping for signals on fiscal easing or tax reform. But the speed of the move in FX, not accompanied by a particularly large move in rates, points to positioning still heavily long USD despite squeezes in the past week," says Lignos.

Analyst Asmara Jamaleh at Intessa Sanpaolo now believes the Dollar has reached a temporary limit, which could aid GBP/USD over coming days.

For Jamaleh, the message from Trump is twofold: The policies are aimed at fuelling US growth, by supporting both domestic businesses and employment. This triggered a positive reaction on the US stock markets.

But the fact that such a goal will be achieved also by resorting to protectionist instruments, affected the dollar negatively.

"The markets have already partly priced in the positive aspects of Trump’s economic programme, but – probably or at least presumably – not yet the negative ones. This should place a cap on the appreciation of the Dollar," says Jamaleh.

But, Weakness Likely to Continue

We see the GBP/USD pair is currently in a short-term downtrend which is more likely to continue than not.

The pair is trading at 1.2100, where the S1 monthly pivot is providing a support barrier.

The pivot is likely to present an obstacle to more downside as it is level traders often initiate counter-trend trades.

Given the overall short-term trend is down, we expect the pivot to eventually give way and the pair to move even further ‘south’.

A break below 1.2050 would confirm a break lower, to an initial target at 1.2000.

The MACD also looks like it is poised to break lower, increasing the probabilities of further downside.

The bearish move down is supported by an Elliot wave analysis of the pair, which indicates a 5th Elliot wave down is either in the process of unfolding or is likely to unfold soon.

Fifth waves are always in the direction of the broader trend, which in this case is bearish.

They are the final wave in a series and therefore mark the latter stages of the trend.

This one will probably reach the wave three lows at roughly 1.1450. 

Of note, this target equates roughly to where the research team at Goldman Sachs see GBP/USD falling to.

Analysts expect another bout of Pound weakness to dominate action in 2017.