Pound-to-Dollar Rate Heads North but How High Can it Go?

- GBP takes run at key technical level as USD weakens.
- Politics, politics, politics...and some technicals, drive shift.
- GBP/USD move to 50-day moving average in 1.30s is possible.

© moonrise, Adobe Stock

The Pound-to-Dollar rate is at an inflection point after attempting to penetrate the downward sloping trendline running from its April peak, and signals from the charts are mixed.

If the exchange rate breaks the trendline, which would be confirmed by a move above the 1.2950-75 area, the foundations for a more prolonged move up to the 50-day moving average around 1.3075 will have been laid.

Above: Pound-to-Dollar rate shown at daily intervals. Captures challenge of trendline.

The pair has formed a bullish 'three white soldiers' Japanese candlestick continuation pattern since it started rising last week, which further supports the possibility a new uptrend beginning.

The Relative Strength Index (RSI) momentum indicator has risen strongly during the recent rebound, suggesting the recovery is underpinned by real 'buying intent' and further underscoring the possibility of an upside breakout.

The RSI has reached 48, a level it last visited in July when the market was trading around 1.32, which also points to more upside being on the horizon.

However, and admittedly, the pair touched the same trendline back in July and was successfully repelled from it. The same thing cannot be ruled out this time either.

Above: GBP/USD shown at daily intervals. Captures 10 and 20 period moving averages.

Further on the downside, the exchange rate is still trading inside the 'sell zone', which is the space between the 10 and 20 period moving averages (MA). Some traders say this is the optimum point to bet on exchange rate falls so a flood of bearish bets against the GBP/USD rate in coming days cannot be ruled out.

If a bearish candlestick pattern forms in that sell zone, the bears will almost certainly pounce on it, which could then push the exchange rate lower.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

Dollar Fundamentals Deteriorate

The Dollar is turning lower after months of strong gains and analysts are forecasting further downside for the currency.

The two more interest rate hikes likely to come from the Federal Reserve this year are already priced into the Dollar, according to analysts at Commerzbank, so the Fed is unlikely to provide support to the Dollar for a while.

"The Dollar probably now requires a new idea to drive it higher, says Viraj Patel, an FX Stretgist at ING Group. "There is no fresh news or impetus for the Dollar to rise."

Another theme driving the Dollar lower is concern that President Donald Trump may be seeking to push it down given his numerous previous comments on the currency and recent criticism of the Federal Reserve.

ING's Patel says there is a possibility Trump could cite a 'national emergency' as grounds for using executive powers that enable him to indirectly intervene in the market and weaken the Dollar. He has used the same argument to impose tariffs.

Trump could use the Exchange Stabilization Fund (ESF) to sell dollars and buy currencies like the yen and euro without making a national security argument.

But the ESF has only around $20 bn of US Dollar assets, which wouldn't be enough to take on a $4 trillion per day market. So it's possible the White House could choose to make a national security case in order to commandeer the +$4 trillion balance sheet of the Federal Reserve.

Another factor in favour of a EUR/USD revival is fresh talks between the US and China, which could yield an easing in tensions over trade between the two. Previously, an escalation in the tariff conflict had driven a rise in the US Dollar by increasing demand for safe-haven assets. A reduction in tensions would do the opposite.

Rising political uncertainty in the US could also be a catalyst for a weaker Dollar if it places a question mark over Trump's position in the White House.

Paul Manafort, Trump's former campaign manager, was convicted of fraud and campaign finance violations this week while the president's ex-attorney Michael Cohen pleaded guilty to similar charges.

If the developments hit support for the Republicans at the midterm elections in November then they would not only limit hi ability to implement his own policy agenda, but could give rise to an opposition attempt at impeaching him.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here