GBP/USD Rate: Get Ready, a Break Out is On the Cards!

The Pound to Dollar conversion has been oscillating in a broad range between 1.20 and 1.27 since November 2016, but even within that range the pair has seen fluctuations narrow. 

Looking at the four-hour chart, we are left with a triangle formation.

Meanwhile, volatility is notably low levels.

Also note that we are seeing some convergence on the 50 and 100 day moving averages in the below chart:

Typically such compression represents periods of market contraction and is often a predecessor to price expansion, otherwise known as break-outs.

“While prices remain trapped in their current range, we are getting to a window of opportunity for a breakout to develop, so we are watching price action closely today," says Lloyd’s Bank’s Robin Wilkins.

If the Pound fails to rally Lloyds see the risk of a test through 1.2400-1.2345 support.

"A rally up through 1.2500-1.2570 is needed to suggest a move back towards the broader range highs,” said the Lloyds analyst.  

Although many analysts are bearish about GBP/USD seeing Dollar strength as inevitable, Nordea Bank’s Aurelia Augulyte argues that the pair is more likely to rise.

Her view is based on the fact that real wages are higher in the UK than in the US.

By this, she means that wages adjusted for inflation result in a higher net take-home for workers in the UK than US and this is likely to be reflected in more solid consumer data from the UK.

Although this was not borne out by recent retail sales data, which came out disappointingly low in the UK but surprisingly high in the US, the analyst is correct about real wages.

US Dollar Outperforming as US Bond Yields Continue to Rise

At present we would have to lean towards a breakout occuring to the downside noting the USD to be broadly higher, with the DXY index rising a little more than 0.5% on the session so far.

The Dollar has found support on comments from Philladelphia Federal Reserve President Harker who suggested that he would not take March “off the table” at this point.

"The comments are in line with his previous remarks but add to the steady drumbeat of messaging from Fed speakers over the past couple of weeks which have lifted, if only modestly, the prospects of a 25bps rate increase occurring on March 15th," says Shaun Osborne at Scotiabank. 

Odds are now priced at a 36% probability, according to Fed funds futures.

Note that Harker is speaking again at 12.00ET while the focus on policy prospects likely means a little more interest in the January 31/February 1 FOMC minutes which will be released on Wednesday.

"Rising US yields are supporting the USD via a clear widening in USD-supportive yield differentials," says Osborne. "The Eurozone-US spread has reached 207 bps this morning, a little beyond the levels seen in late 2016, and constitute a strong source of support for the USD."

Note that spreads have widened even with the Eurozone producing some strong PMI readings from February.

We note French yields are down on latest polling showing France's Marine Le Pen is closing down the gap on her main challengers for the French Presidency.