GBP/USD Rate Today: US Tax Reform 'Noise' Could Move the USD

Pound Sterling is seen grinding higher against the US Dollar on Thursday, March 30 with GBP/USD quoted at 1.2413 at the time of writing.

We are told by a prominent analyst that the next big moves in the GBP/USD exchange rate could well be derived from the United States today.

Viraj Patel at ING in London says those watching foreign exchange markets should keep an eye on tax reform noises out of Washington as President Trump reviews his options on the matter today.

Trump will be presented with possible options by a group of administration officials including Gary Cohn, head of the National Economic Council, according to three people familiar with the meeting who asked not to be identified because the details are private.

Global foreign exchange markets are returning to some order following last week's ‘Trumpcare’ related moves – with the US Dollar staying mildly bid, but within ranges.

"Further support for the Dollar may be on its way; media reports suggest that the President will today be presented with possible options by a group of administration officials on a tax policy package," says Patel. "While House Speaker Paul Ryan's tax plan is thought to be one of those under consideration, we may also see a return of the more conservative tax plan made by Dave Camp (former Ways and Means Chairman) in 2014."

For investors, these are just semantics and the story is still positive for US reflation argues Patel.

The Dollar had risen in convincing fashion following the Donald Trump's victory in the November 2016 elections as markets expected inflation to rise strongly under his tenure amidst fresh tax cuts and spending increases.

The so called Trump trade has however since reversed as questions were asked of the President's ability to deliver on his agenda.

GBP/USD Due a "Short-Squeeze" Higher

Recent price action has been relatively subdued despite the current media hype surrounding Sterling in what is certainly an historic week for the UK. We saw Theresa May has deliver the UK exit letter to her European Union colleagues, officially starting the Brexit process, but Sterling remained stuck within recent ranges.

However, the debate surrounding the outlook for the currency is as lively as ever.

With so much uncertainty hanging over the UK economy, it is logical to think that the British Pound could remain under pressure.

And that may well be the case in the long-term, as after all Scotland’s future in the UK is becoming increasingly questionable.

But that does not mean Sterling cannot climb higher over coming days in line with recent trends.

“In the short-term, Sterling could be on the verge of a massive short covering rally,” says Fawad Razaqzada, a foreign exchange analyst with brokers Forex.com.

Razaqzada says it is unlikely that governments within the EU would seek to punish the UK just because its people have decided that it should leave the union.

“Instead, the EU will likely hold constructive talks with the UK government to find a deal that would benefit both regions,” says Razaqzada showing a bias towards a constructive and Pound-friendly path forward.

A trigger behind an extension of the ongoing GBP recovery could be if speculators unwound the record-high Sterling short positions that they have been accumulating in recent months.

“Consequently I am on the lookout for short-to-medium term bullish price patterns to form on the GBP/USD and other GBP pairs in the coming days,” says Razaqzada.

What is a Short Covering Rally?

In any betting market there is the potential for the majority of punters to bet on what they perceive to be the sure-fire bet.

In foreign exchange markets the past year has seen a falling Pound Sterling provide such a bet.

But foreign exchange markets are binary in that there is always someone else on the other side of every deal - in short a bet on the Pound requires a buyer.

What if so many people are betting in a particular direction? Well, in all likelihood you will run out of participants willing to take the other side of the bet.

The bet then becomes crowded and as this happens so the trend slows down.

Now if the market suddenly moves in the opposite direction of the bet a good number of punters are suddenly forced out of the market. This can soon create a snowball effect as more and more people are forced out of what was once a sure-fire bet.

This countermove is called a short-covering rally and is typically one that is technical in nature.

GBP / USD Forecast

Currently, GBP/USD is stuck within its wide 1.20-1.27 range.

But is in the upper half and above the now rising 50-day moving averages. A couple of higher lows have now been formed.

“Thus price action is already starting to look bullish, though while inside the range, expect to see further choppy price action as clearly a lot of people are still bearish on the pound,” says Razaqzada.

Forex.com’s first bullish objective is the top of the range around the 1.2680/70 area, where we also have the 200-day moving average converging.

“But to get there, it will first need to clear some short-term resistance levels for example at 1.2480 and 1.2615. Otherwise, a deeper pullback may be on the cards before the potential rally,” says Razaqzada.

Analysts at Societe Generale meanwhile anticipate more of the same from GBP/USD and say it will likely persist within the current phase of consolidation.

GBP/USD has probed the multiyear down sloping channel.

Interestingly, it has met resistance near the upper bound (currently at 1.2610) of the triangle within which it has been evolving since last October.

"It is now on approach of an hourly channel near 1.2350 which is also the 50% retracement of recent bout of recovery. If this gives way, GBP/USD will resume its correction and head towards 1.2225 and even towards triangle lower bound at 1.2155/1.21, says Stephanie Aymes, a technical strategist with Societe Generale.