British GBP/USD: Next Target 1.33 but Bank of America see Turn Back to 1.25

Pound Sterling has jumped to new multi-month highs against the Dollar on Thursday, May 18 thanks to some consensus-beating economic data being released in the UK.

The Pound to Dollar exchange rate rose to a daily high at 1.3048 following a report that UK retail spending for May rose 2.3%, an impressive beat on the 1.0% figure expected by economists.

This is the exchange rate's best level since September 2016.

Foreign exchange markets are buying Sterling under the presumption that the UK economy will actually put in quite a decent performance for the second quarter.

There had been growing concern that the all-important consumer was withdrawing in the face of rising inflation and stagnating wage growth.

Meanwhile the US Dollar retains a subdued tone amidst the ongoing saga besetting the US administration, more details lower in this piece.

The move above 1.30 represents a major psychological coup for Sterling-bulls and one that was signposted yesterday by a leading technical analyst we follow.

“The GBP/USD has now spent about 4 weeks in a relatively tight consolidation,” says Fawad Razaqzada at Forex.com. “But this is considered a bullish consolidation because it has allowed the Relative Strength Index (RSI), which is a measure of momentum, to unwind from ‘overbought’ levels through time rather than price.”

The RSI had moved to ‘overbought’ levels because of the rally in price since mid-March. Given that there has been very little retracement after that rally, it suggests to Razaqzada that it is the buyers who remain in control of the trend.

“The sellers, sensing this strength, may move away, and the liquidation of their positions alone could be enough to cause another upsurge in the GBP/USD, which could potentially happen as early as today,” says the analyst.

How High Could GBP/USD Go?

Forex,com believe that if the key 1.30 handle breaks decisively then there is nothing significant in terms of prior reference points until around the 1.3335-45 area.

“So, there is a possibility for a sharp rally if and when 1.30 breaks. However, this bullish technical outlook would become invalid if we see a failure at or around 1.30, accompanied by a reversal-looking candlestick price pattern on the daily chart,” warns Razaqzada.

But if these conditions are not met, then the analyst believes any weakness in Sterling could be short-lived, as after all the trend is now objectively bullish with the moving averages having moved in a periodic order: 21 above 50 above 200.

“What’s more, broken resistance levels such as 1.2775, 1.2850 and 1.2900 have all turned into support,” says Razaqzada.

However, a new report from Bank of America, released Thursday, May 18 cautions on exuberance towards the Pound which is trading higher in something of a vacuum in terms of Brexit news. 

"GBP will end the year lower, in our view, as Brexit negotiations will have a very difficult start. We remain optimistic for the final outcome and will buy the GBP dip, but we do see a dip ahead," says Athanasios Vamvakidis at Bank of America Merrill Lynch Global Research.

BofAML also see high risks of the negotiations temporarily collapsing at some point, triggering market turmoil until the two sides go back to the negotiating table.

"In this context, we see GBPUSD trading below 1.25 before trading above 1.30 in the months ahead," says Vamvakidis.

>> Update: Best retail international payment rate on GBP vs USD now seen at 1.2837, banks seen offering in region of 1.2501-1.2591. Details here.

Dollar Hit by Trump Turbulence

The persistent barrage of attacks on the US administration are taking their toll on a US Dollar already contending with a softer run of data and scaled back Fed rate hike bets.

Markets are now foucssing on a new report out Thursday that Michael Flynn and other advisers to Donald Trump’s campaign were in contact with Russian officials and others with Kremlin ties in at least 18 calls and emails during the last seven months of the 2016 presidential race, current and former U.S. officials familiar with the exchanges told Reuters.

The previously undisclosed interactions form part of the record now being reviewed by FBI and congressional investigators probing Russian interference in the U.S. presidential election and contacts between Trump’s campaign and Russia.

Investor confidence in the US administration - so important for the US economic growth story - had already undermined by the saga concerning Donald Trump’s sacking of former FBI Director James Comey.

The president’s future is now drawn into question more than ever before in his short-term stint at the top.

Recall that the whole run higher in the US Dollar since November was premised on Trump’s promise to deliver pro-USD policies. A future without Trump in it is therefore understandably one to be considered by foreign exchange markets.

"The ‘Trumpeachment’-led meltdown in global financial markets may have had a line temporarily drawn under it after the US Justice Department announced that it was appointing former FBI director, Robert Mueller, as special counsel to lead the investigation into Russia’s role in the 2016 US elections. The move received support from both sides of the aisle, while Trump himself remains undeterred," says Viraj Patel at ING concerning the latest developments in the sage.

The lull in newsflow over the subject has allowed the Dollar to regain some lost ground.

The US Dollar index - a measure of the Dollar’s value against a basket of major currencies - fell for the fourth straight session yesterday to 97.45, its lowest level since the US presidential election.

The bearish sentiment towards USD was evident in the fall in US stocks and bond yields on the lower-than-expected housing starts and building permits data, and fell more despite the better-than-
expected industrial production and capacity data later.