Pound-to-Dollar Rate Tears Higher - Potential Upside Target Eyed at 1.34
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- Sterling soars after retail sales beat, broad-based Dollar weakness
- Dynamics of progress on Brexit front underpinning gains
- Technical forecasting method as well as strategist view coalesce at 1.3400 target
The Pound has risen against the US Dollar to hit a two-month high at 1.3288 thanks to a combination of broad-based gains in the Pound and a broad-based sell-off in the Dollar.
In fact, the Pound is the best performing major currency on the day, while the Dollar is the second-worst performing currency on the day thanks to a rejuvenated global market place that believes the worst of the trade wars are now behind us.
"An easing in global risks has kicked away a leg of support for the safer U.S. currency. While the U.S. and China stepped up their trade quarrel this week, the modest tariff increases were considered less draconian than expected and thus likely to have only a muted impact on global growth," says Joe Manimbo, a foreign exchange analyst with Western Union.
The Pound meanwhile benefits from a combination of expectations that a Brexit deal will be achieved by November and the release of consensus-beating retail sales data. "Sterling soared more than a percent to mid-July highs after unexpectedly bullish U.K. retail sales depicted a resilient consumer, a positive sign for third quarter growth," adds Manimbo.
But can the Pound-to-Dollar exchange rate sustain the gains, and how much higher is it likely to go before it hits the next ceiling?
From a technical perspective, there are also specific tools which can be used to forecast prices.
GBP/USD broke above the trendline drawn from the June highs on Monday and according to technical analysis, such a break will normally run a similar distance as the move which preceded it.
Using this method as a guide and taking the preceding move as the rally which began at the September 5 lows, we get an upside target of 1.3408. A more conservative estimate takes 61.8% of the move and extrapolates it and this finds a target at 1.3292.
Another key technical level is where the 200-day moving average (MA) is situated at 1.3519, at about the same level as the June highs at 1.3473. The zone around these, which has a midpoint at 1.3500, is likely to resist further upside as short-term bearish technical traders enter the market with the intention of shorting the pair in anticipation of a pull-back.
Another way of trying to determine the limit of upside progress it to use a forecasting tool for GBP developed by FX strategists at ING depending on different Brexit-deal and monetary policy scenarios.
The Bank of England-Brexit matrix (see below) posits different outcomes for GBP/USD and EUR/GBP depending on the two most significant variables for the Pound - Bank of England interest rate policy and the evolution of the withdrawal deal.
To work out where Sterling should be it is just a question of finding the row and column which most fit the present conditions and seeing where they intersect.
The BOE rate hike in August was taken by many as being a 'dovish hike' or a 'one and done' so that determine's the row whilst the correct column for the current situation in negotiations is the one probably entitled "solid signs of progress".
The matrix for this set of coordinates gives a predicted rate of 1.3400 for GBP/USD and 0.8700 EUR/GBP, or 1.1495 for GBP/EUR.
This is roughly the same as the rate predicted for GBP/USD based on the technical method following a trendline break.
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