Pound-to-Dollar Exchange Rate: Next Potential Targets

The British Pound suffered its worst day of losses against the Dollar since the June election, what are the next targets for the exchange rate?

GBP/USD fell below 1.3200 by a point (to 1.3199) during the sell-off which took traders by surprise given the recovery on Wednesday, which saw GBP/USD reach highs of 1.3287 after better-than-expected Service sector survey data fueled a short-lived recovery.

A deeper penetration is forecast by technical analyst Karen Jones at Commerzbank who argues that should the pair break below 1.3228, it will have reached a tipping point.

The move would be "enough to negate upside efforts and signal another leg lower to the 1.2888 2016-2017 uptrend."

Technical analyst Robin Wilkin at Lloyds Bank says he remains biased for a move to 1.30-1.28 support, "which may define the lower boundary of a medium-term range".

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While most analysts are bearish the pair but taking an unusual contrarian viewpoint is Société Générale, Quantitative Analyst, Olivier Korbier, who advocates buying GBP/USD Call Options on dips as it is likely to go higher medium-term.

"The lower spot provides the opportunity to Buy distant OTM (out of the money) calls, as the GBP risk is now getting very asymmetric," said Korbier.

Out-of-the-money Call Options are bets the exchange rate will rise above a level quite far above the current market level (thus 'out-of-the money').

Korbier cites several factors favouring the trade, which we summarise below:

a) Monetary policy: the BoE is more hawkish on the back of higher inflation prints - helped by a weaker currency.

b) Slower Brexit negotiations. Theresa May’s 22 September speech sounded optimistic, proposed a two-year transition period and pushed to find a creative solution to the trade negotiations. This should reassure the market. The UK economy remains relatively robust (despite evaporating data), "preserving cable’s positive correlation with the strengthening euro," according to Korbier.

c) Market Positioning - the number of futures contracts held by large speculators has turned from net short to net long which is bullish for the pair.

d) There is a minimal but existing probability that Brexit will not in fact happen, "or is implemented in a way that convinces the market that it will do no harm at all," says Korbier.