Our studies of the GBP to USD conversion's charts give us some important clues on where the next big move for this exchange rate will likely be.
Sterling has seen the range it trades against the US Dollar become increasingly compressed; something that hints on where future direction possibly lies.
The long sideways range which followed the post-Brexit breakdown has adopted the form of a triangle (symmetrical) with four completed waves so far – a,b,c and d.
It is noot clear whether an e-wave has begin as the recent bounce which we thought was an e-wave has capitulated due to the release of strong US data overnight which showed a rise in GDP, a narrower trade deficit and a fall in initial jobless claims.
Nevertheless, once complete will mean the triangle has its minimum complement of five waves:
On completion there will probably follow a high volatility breakout to the downside, since triangles are more likely to fall in the direction of the trend previous to their formation.
As for wave e - it could end at any moment or move higher to the upper border at 1.3300, assuming a break above the 50-day moving average and 1.3200.
Commerzbank’s technical analyst Karen Jones - who also notes the triangle - suggests the current e-wave bounce may meet tough resistance at 1.3069, and potentially halt there, or reverse.
“GBP/USD is seeing a tiny bounce from the base of a symmetrical triangle at 1.2925. We have a near term resistance line at 1.3069 (nearby high is 1.3119). And will consider the market remains directly offered below here.”
We would wish to see a close below 1.2800 for confirmation of a breakout, with a downside target generated at robust support at 1.2620.
The MACD indicator circled above is also bearish as it has moved below the zero-line.
Karen Jones sees the possibility of even deeper declines:
“A close below 1.2925, will trigger losses to the 1.2797/50 July low and the long term Fibonacci support. A close below here would be regarded as very negative and target circa 1.22.”
The current e-wave bounce mainly reflects a weakness in the dollar side of the pair, despite recent positive data which showed a nice bump in Consumer Confidence to 104 when a fall to 99 had been forecast and Services PMI which rose to 51.9 from 51.0, when a rise to 51.2 had been expected.
Analysts at Citibank argue the previous steep decline in Services PMI, which took it down from 55.0 to 51.0 in August was such a steep drop even the recovery to 51.9 is not enough to erase doubts about the sector.
The rise in Consumer Confidence they put largely down to an upbeat view of the labour market.
This may not automatically translate into rising wages, according to CIBC’s Avery Shenfield, since as research has proven, rising wages tend to chase higher inflation rather than cause the inflation.
This is the opposite to received wisdom and tests the assumption that the tightening labour market in the US will necessarily translate into rising prices and then a higher likelihood of the Federal Reserve (Fed) raising rates, which in turn would result in a stronger dollar, from more foreign capital inflows.
The pound, meanwhile, also remains pressurized by uncertainty over what sort of deal the UK will negotiate with the European Union (EU).
The example of Switzerland shows the EU took a hard-line when the country tried to negotiate a control of freedom of movement whilst maintaining membership of the common market.
The EU is likely to similarly remain tough in negotiations with the UK, which may lose access to the common market as a result of determination to control immigration.