The GBP to USD conversion has failed to capitalise on the positive boost it received from the US Federal Reserve mid-week ensuring the outlook remains negative for this pair.
A quiet UK calendar will leave the Pound focused on broader themes ahead of the weekend, much as has been the case for the entire week.
The UK currency has managed to find some bids in the aftermath of a less hawkish FOMC decision and some relatively upbeat comments from the Bank of England's Kristin Forbes who said the impact post referendum hasn’t been all that bad and that additional rate cuts aren’t required at this time.
"Still, there are many out there who would disagree with Forbes and the market remains
concerned about the longer term structural damage to the UK from the Brexit process," says a note from LMAX Exchange Research & Analytics.
Meanwhile, solid US jobless claims reinforce the notion the Federal Reserve will likely raise interest rates in December, "which puts yield differentials squarely in the Dollar’s favour", say LMAX Exchange.
US Federal Reserve rate-setters decided to hold back from making a rate increase and employed timid language to describe the chances of a before-end-of-year hike in the accompanying statement.
The move sparked a fresh bout of stock market appreciation and broad-based US Dollar weakness, of which the Pound took advantage.
A a recovery in GBP/USD saw the pair pop back above 1.3000.
Indeed, the dollar’s decline was a little surprising given three members of the FOMC voted for an interest rate increase when only one voted for it at the last meeting, but it seemed the language of the statement was taken more seriously.
ING Bank’s FX Analyst Viraj Patel thinks the market may be wrong about the Fed and the dollar’s fall post FOMC represents an inaccurate evaluation.
“We remain cautious over chasing the post-FOMC risk rally higher and prefer to fade any USD downside – though it may take some better US data or closer election polls to trigger any material shift in sentiment,” said Patel in his morning note.
This would imply the rebound is only a temporary phenomenon and a chance to get long the dollar at a more advantageous price.
From a technical perspective most analysts see the pair stuck in a range between lows of 1.28 and highs at 1.3533, with breaks above or below required to initiate an extension, but a break below favoured:
It could also however be argued the pair may be in the process of forming a triangle (see chart below), which is currently rising in its final ‘e’ wave:
Such an interpretations would also forecast an eventual break lower since triangles normally break in the same direction as the previous trend, which in this case is bearish.
Once wave ‘e’ higher completes, the pair should capitulate, with a break below the ‘b’ wave lows at 1.2863 confirming a breakout lower, to a target at 1.2700.
Alternatively, a break above the 1.3447 ‘c’ wave highs would signal a probable breakout higher to an initial target at 1.3600.
The more favoured outcome is further bearishness but both are possible since the triangle is of the symmetrical variety which give less clues as to the eventual direction of the breakout.