Pound v Dollar Reaching Critical Crossroads at the 1.2800 Level
The Pound to Dollar exchange rate was rallying up quite strongly until it hit a ceiling at the 1.30 level on May 19.
A downwards revision to first quarter UK GDP to only 0.2% (from 0.3%), however, led to a steep decline, and this combined with renewed Brexit fears speeded the pair’s selloff.
GBP/USD experienced a highly negative week following the release of the latest UK GDP figures for Q1 which showed a decline to 0.2% from the estimate 0.3% print.
This was a relatively significant negative result and caught the market largely by surprise, which saw the support drop away and price action decline over 130 pips for the session.
In addition, the ongoing turmoil around the UK general election is also impacting the pair with the conservative government currently hanging on to a five seat majority based on the latest polls.
"Subsequently, the pair ended the week sharply lower around the 1.2803 mark which coincides with the 100 day Moving Average,” says Blackwell Global’s Steven Knight.
GBP/USD has broken below a major trendline drawn from the October 2016 lows at the end of the week as Theresa May’s poll ratings slumped to barely a 5.0% lead.
Investors had been hoping she would win a landslide victory which would provide her with the mandate to negotiate a softer Brexit, however, that does not appear to be a given anymore.
The EU’s demand for a 100bn Brexit divorce bill has also weighed on Sterling as it is highly unlikely the UK will agree to such an impossibly high get out fee, and this could lead to a hard Brexit and WTO trade rules.
The break below the trendline, however, is a very bearish sign indicating the pair will probably fall further, as technical theory stipulates moves following trendline breaks (Y on chart) are normally of an equal length to those immediately prior to the break (X on chart).
This suggests a substantial down-wave is currently gestating and is likely to unfold down to roughly 1.2645 - the same target as in our week ahead forecast.
The only problem with this perfectly valid forecast is that there are several layers of support just below the current level that could very well impede future downside.
Firstly, there is the 50-day moving average at 1.2775 and then the monthly pivot at 1.2748.
These are both extremely tough levels of support which will be difficult to break below.
Nevertheless, if the exchange rate breaks back below the existing 1.2773 lows, it will be a clear sign confirming more downside.
Other analysts ignore the support and remain very bearish.
Karen Jones, a technical analyst with Commerzbank says:
“The erosion of the short term uptrend at 1.2839 has seen the market sell off to 1.2776 the 6th December high, we would allow for a tepid bounce from here ahead of losses to the 1.2591/61, and the 200 and 55 day ma.
“Where are we wrong? Intraday rallies are likely to struggle 1.2865 and remain capped by 1.3060. Only above here would target the 1.3446 September 2016 high. Short Term Trend (1-3 weeks): Appears to have topped 1.3049/60 Long term trend (1-3 months): Neutral to negative below 1.3060."
Throwback Offers Entry
The current very short-term recovery following the piercing of the trend-line which has seen the exchange rate pull-back up to the trendline could be described as what is known as a ‘throwback’ or return move.
This happens immediately after an exchange rate has broken below a trendline, when it suddenly reverses and pulls back up to the underside of the trendline temporarily before rotating and continuing lower again.
This often offers traders an excellent low risk entry point for entering a trade.
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