GBP/USD Rate: 5-Month Lows Eyed by Commerzbank’s Jones
- Written by: Gary Howes
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The GBP/USD exchange rate has fallen back as foreign exchange markets continue to place bets on the prospect of a series of interest rate rises being delivered by the US Federal Reserve over the duration of 2017.
The GBP/USD exchange rate has slipped to 1.2266 but has gone as low as 1.2242 over the course of the past 24 hours.
As we note here, a slide to 1.22 looks to be on the cards in the near-term based on the negative momentum.
Further guidance on Pound Sterling’s outlook against the Dollar - covering a slightly longer timeframe - is provided by respected technical analyst Karen Jones of Commerzbank.
In a briefing to clients, Jones observes GBP/USD to have eroded the 55 and 200 day moving averages and as a result she is eyeing a fall to initial support at 1.2250.
“Failure here will trigger losses to the 1.1988/80 recent low and the bottom of the 5 month range at 1.1935,” says Jones.
Areas of support are where buying interest in a particular market is located and can often be predetermined based on a number of factors including precedent.
We have seen demand for GBP/USD pick up on previous occasions on the approach to 1.2250 and it could be the case again this time around.
Very near-term, Jones expects the market to undergo some consolidation however, noting the 13 count on the 60 minuate chart and the TD support at 1.2239.
If Jones’s bearish view is wrong and the Pound starts appreciating watch for confirmation on a break of initial resistance is 1.2583.
“Only above 1.2675 channel would allow for further strength to the 1.2776 December high,” says Jones. “Between here and 1.2836 lies several Fibonacci retracements and major resistance and we suspect that it will struggle here.”
What could trigger an improvement in Pound Sterling's prospects against the Dollar?
A host of US Federal Reserve policy-makers are due to deliver speeches on Friday and markets are expecting them to hint at an interest rate rise at the March meeting.
More details on the speakers and the time they hit the airwaves can be found here.
The USD is generally slightly softer leading into the final session of the week with recent bullish momentum having stalled as the market is close to fully priced for a March hike.
Cleveland Fed’s Mester said overnight that the Fed was hitting both its employment and inflation goals, but this had little impact and attention is now squarely on Chair Yellen’s remarks late today.
"Fed-speak rises to a crescendo today, before the blackout ahead of the March 15 FOMC meeting. Speakers include Chair Yellen and the message from other Fed officials has been fairly unambiguous – the default position is that rates rise on March 15 and the onus is on the data or news-flow stopping that happening," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.
Markets now attach almost an 80% probability to a hike and 2½ hikes are priced for the full year.
"While the probability of a March move seems more likely to rise toward 100% than to fall, further upside for USD on rate expectations is probably limited from current levels," says Cole.
US Dollar to Break to New Multi-Year Highs
The USD bull market has entered its sixth year and we are told to expect the USD to regain broad-based strength in 2017.
In a new client briefing, analysts at Morgan Stanley say the long-term uptrend in the Dollar will extend as a new driver kicks in - that of domestically-generated economic strength.
Analysts note that until autumn last year, the USD was driven by external economic and financial stresses:
- The Eurozone's sovereign debt crisis (2011),
- China's slowing growth (from 2012),
- Abenomics-driven JPY weakness (2013),
- Capital import dependent economies falling into recession (2014)
- and China engaging too early in opening its capital account (2015), triggering volatility.
"It was only in September 2016 that the USD became driven by US developments, such as increasing indications that the US was closing its output gap and the new Trump administration’s fiscal ambition," says Morgan Stanley analyst Hans Redeker.
This new relationship became evident when US inflation expectations and the USD started moving simultaneously higher.
"Before it was the rising USD that was pushing US inflation expectations lower. Now, as the US has closed its output gap, rising investment return expectations have boosted capital spending plans, and we believe the US will either see the USD breaking higher supported by capital imports or USD funding costs moving up," says Redeker.
