This Carney Rally Could Take GBP/USD Rate as High as 1.35, But Watch Key Resistance Points

The British Pound's winning streak against the US Dollar continues with GBP/USD now knocking on the door of 1.30.

The 2% rise over the course of the past five trading days repesents one of the strongest running streaks for the Pound in months as the rate opened the week around 1.27.

This number represents a significant pyschological test for the Pound but our money transfer cost calculator suggests the spot-market rate would need to hit at least 1.32 before those with international payments see 1.30 becoming available.

Indeed, for those who still use their banks to transfer money it would need to hit the 1.3375 mark before this magical number becomes available.

So can we see the spot market exchange rate move high enough?

Bank of England Sparks a Rally

Hints that the Bank of England might raise interest rates in 2017 has seen GBP/USD record a near-300 pip advance this week, and we are told further gains are likely.

At central banking forum organised by the ECB in Portugal, Bank of England Governor Mark Carney argued that monetary stimulus would be withdrawn if spare capacity in the economy narrowed.

Prior to his comments Carney’s position had been to leave interest rates unchanged due to high inflation outstripping wage growth.

‘Spare capacity’ is a term economists use to describe the resources lying idle within an economy, whether human or machine; ie not being fully utilised.

"Right now in the UK, output is approaching potential and the capital overhang looks set to be eliminated over the next few years,” says Carney.

In a highly technical discussion, Carney says that the Bank would remove accommodation – another way of saying raise interest rates – if business investment held up and consumption did not fall as much as is feared.

"If companies want to expand they're going need to invest,” says Carney.

The Pound would typically be expected to benefit if the Bank increased interest rates as higher rates attract more international capital. Hence the strong positive move to the Governor's comments.

Next Targets for the Pound to Dollar Exchange Rate

The Pound to Dollar rate has risen to an initial peak of 1.2976 since the comments.

We wrote a break above those highs would give a strong bullish signal that the pair was going to continue higher, with an initial target at 1.3025. 

This has since been met.

Our studies see the next target at 1.3150, but this is dependent on a break above the 1.3051 May highs.

The R2 monthly pivot stands as an obstacle to further upside at 1.3026 and the pair is likely to see significant selling at that level, which could lead to the up-move stalling, reversing or correcting.

Monthly pivots are key levels where traders often fade the trend, putting pressure on the exchange rate.  

The MACD momentum indicator is showing a bullish cross, albeit still below the zero-line.

Commerzbank’s technical analyst Karen Jones, is cautious of Sterling's prospects saying, “the previous range 1.2775 – 1.3060 should now act as a formidable nearby resistance.”

“Only a break above 1.3060 would target the 1.3446 September 2016 high,” argues Jones.

Analysts at ING Bank N.V. say they believe currency markets will send the Pound higher in anticipation of further pro-Sterling central bank rhetoric.

We saw the EUR show some convincing follow-through buying after Draghi’s remarks at the same ECB conference.

As such, “there are short-term risks that the GBP/USD rally could extend to technical resistance in the 1.3050/1.3100 area,” says analysts Viraj Patel at ING Bank’s London branch.

“That may mark the top for the time being;” says Patel. “If not - and we see a daily/weekly close above 1.3100 - a more significant re-assessment of the BoE hiking cycle may be underway and 1.35/38 cannot be ruled out.”

Analyst Robin Wilkin at Lloyds Bank also sees 1.35 as being a possibility.

"The broader USD remains under pressure, with Carney’s change in tone driving GBP and UK yields higher," says Wilkin in a note to commercial banking clients dated June 29.

GBP/USD is seen having broken through the 1.2910 channel resistance, with 1.3050- 1.3100 the next resistance region.

"We are still biased for this area to cap" says Wilkin. "But if yields continue to recover and we break 1.3100 we would have to accept a core change in the market structure, with 1.34-1.35 next resistance above."

Dollar Hits 8-Month Lows

Part of the upward propulsion in GBP/USD is also a result of the Dollar being so weak; so the Dollar remains a key component of the story going forward.

Donald Trump’s failure to get his healthcare bill through the senate due to Republican’s deciding at the last minute that they might not get a majority vote, led the passage of the bill being delayed until after the summer recess.

The savings from the bill, which will replace Obamacare, was expected to pay for hefty tax cuts which would have led to a rise in fiscal stimulus, growth, inflation and ultimately interest rates.

Higher interest rates mean a higher Dollar as international investors send their money to where the yield is rising.

There was further weakness, however, on a Yellen’s ‘kill-joy’ comment about interest rate hikes only being gradual, which also stung market’s growing increasingly optimistic for a rate hike before the end of the year.

“Dollar bullish investors who were in desperate need of inspiration to support the Greenback were left empty handed on Tuesday evening after Yellen maintained a safe distance from monetary policy at an event in London. Although she reiterated that “it will be appropriate to raise interest rates very gradually,” this was old news with nothing fresh brought to the table,” says a brief from brokerage FXTM’s research department.

Yellen also said she thought the chances of another financial crisis within ‘our lifetimes’ was very low because of all the regulation put in place since the great financial crisis.

“While the comment continues to echo her overall optimism over the US and global economy, Dollar bears were unfazed with the Dollar Index sinking towards 96.20 as of writing,” said FXTM.

The comments, reassuring as they were, brought to mind Gordon Brown’s about the end of “boom and bust”, and appeared extremely optimistic coming from a central banker more normally thought of as expressing a calm realism.

Haldane Shores up Support for the Pound

The Pound and Euro’s central bank-driven gains appear to have held on Thursday, June 29 following supportive words being issued by the Bank of England’s Chief Economist, Andy Haldane.

Haldane told the BBC in an interview in Wales that the Bank of England would “look seriously at the possibility of raising rates” in order to defend living standards.

Haldane raised eye-brows in June with his suggestion that a 0.25% interest rate rise could be delivered without risking economic growth.