The Pound-to-Dollar Rate: 1.4345 is a Major Top, Could Move Substantially Lower
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Pound Sterling is probably heading lower against the Dollar again as technical resistance levels conspire with the EU's Michel Barnier to thwart the gains delivered by the Bank of England.
The GBP/USD exchange rate was seen moving sharply lower again after spiking in the wake of Thursday's Bank of England rate meeting with technical considerations combining with newsflow concerning Brexit to conspire against Sterling.
The failure of the exchange rate to hold onto gains despite such a positive endorsement from Mark Carney and the Bank of England has got market participants asking themselves: did the January top at 1.4345 mark a major turning point for the pair?
If it did, then the exchange rate could move substantially lower.
Market analysts have mostly focused in on the 1.3800-50 level of support which has provided a stubborn obstacle to further downside.
They say it needs to be decisively broken for further loses to evolve.
So far, however, that hasn't happened.
"GBP/USD has successfully challenged support at 1.3830 and is bouncing higher. Hourly resistance can be found at 1.4067. The technical structure suggests further potential downside move," says online bank Swissquote's analyst Peter Rosenstreich.
Commerzbank not how support at 1.3836 has held for '3 days now'.
"GBP/USD the 1.3836 February 2016 low has held for 3 days now and produced a much deeper rebound that we suspect may retest the 1.4233/1.4373 key resistance (recent high and 200 week ma)," says Commerzbank's analyst Karen Jones.
Yet after bouncing it will probably recapitulate, says Jones, falling to, "the 1.3658 September peak. Key medium-term support is the 1.3372 2016-2018 uptrend."
Before stating categorically that her position is bearish:
"We continue to view 1.4345 as an interim top for the market and look for further weakness."
The same themes along with the same bearish bias are present in the work of Lloyds Commercial Banking's head of cross-asset strategy Robin Wilkins:
"Prices surged to 1.4067 on the hawkish BoE, but GBPUSD failed to hold these gains. The dynamic suggests we could see another test of short-term support at 1.3850-1.3800. A break there would indicate 1.4345 was a significant top in a broader correction that risks an extension towards 1.3625-1.3550 support."
Our own view, expressed in our week ahead forecast, was bearish if the exchange rate broke below 1.3975, the neckline of the double top reversal pattern which we identified as potentially forming.
From there we calculated a move down to a target at 1.3630 was warranted, which we now see the market probably falling to next assuming it can break below the recent 1.3836 lows.
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Barnier Sinks the Pound
The EU's Michel Barnier has updated journalists on his stance following the conclusion of the latest Brexit negotiations; and what he has to say has not been good for the British Pound.
Step aside Mark Carney, it looks like Michel Barnier is well and truly in charge of the Pound.
Pound Sterling has gone from hero to zero in the space of 24 hours with the currency shedding the gains realised in the wake of the Bank of England policy meeting.
Sterling fell during a press briefing on Brexit negotiations conducted by the European Union's Michel Barnier in which the tone was judged by markets to be negative.
Any hope that we would move away knee-jerk market reactions to Barnier's every breath - as was the case during 2017 - appears to be misplaced.
Barnier told assembled journalists in Brussels that a transitional Brexit period "is not a given".
"Appears Mr Barnier is voicing concerns over the Brexit transition & the Irish border. The Pound is pushing lower as the pendulum shifts from a soft to a hard brexit. Some suggest a soft Brexit is indeed dead, leaving a hard or a very hard option. The Pound should continue to trade lower on the crosses," says Neil Jones, an analyst with Mizuho Bank Ltd.
We take a slightly different reading and believe the worst possible scenario for the British Pound pertaining to Brexit is a that whereby the EU and UK separate abruptly and with no transitional deal being agreed. If no transitional deal can be agreed, you can bet your bottom penny that no trade deal will be agreed which opens the door to the trading relationship between the two jurisdictions defaulting to WTO rules.
Indeed, it is the chaos that an abrupt Brexit presents that is most disconcerting to businesses, and by extension the UK currency.
The UK government will give their comeback to Barnier's tough stance later in the afternoon.
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