The Pound to Dollar Exchange Rate Challenges Trendline, Possibility of Break Lower Increases

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The GBP to USD exchange rate is sliding back from its November highs with the chart's Demark Indicator suggesting the recovery move from the October lows could be exhausted.

The pound to dollar exchange rate has fallen to a key trendline for the rally up from the October flash crash lows.

The GBP/USD is currently trading at 1.2483, down from the November high at 1.2674 reached on November 11th.

With regards to the immediate outlook, we note GBP/USD is currently trading just above the trendline but there is a risk it could pierce below and if so that would generate a high probability move lower to the next target at support at 1.2375.

A break below the 1.2450 level would provide confirmation for such a breakout move.

Further evidence the pair may fall is suggested by Tom Demark’s Countdown indicator which, according to Karen Jones at Commerzbank, is indicating the up move may be reaching an exhaustion point, denoted by a “13 Count”.

Jones also states that the move up from the October is “corrective”in nature rather than ‘impulsive’, which is further evidence that it is likely to run out of steam and be ready to resume its downtrend again.

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The four-hour chart of GBP/USD shows the exchange rate is in a clear up trending channel.

Normally channel breakouts lead to moves which are the same length as the height of the channel extrapolated lower.

This would seem to indicate another possible target could be at 1.2200, with a break below 1.2300 confirming the extension down.

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Bullish Continuation?

Alternatively, in the absence of a break below the trendline, the same level could provide a support pad for a continuation of the short-term trend higher.

Such a continuation higher would gain confirmation from a break above the 1.2674 highs, confirming a move up to resistance at 1.2830.

The move higher in the USD has its roots in the surprise outcome of the US presidential election which has seen the trade-weighted (TW) USD has gained around 1.5%.

Although the initial reaction was very much in line with our expectations – riskoff, with the dollar lower against low-yielders and higher against high-beta, risk-sensitive currencies – subsequent developments have somehow gone against what markets had anticipated.

We suspect that Mr. Trump’s victory speech struck a far more conciliatory tone than expected and focused on infrastructure spending, which, was seen as positive for growth (via the fiscal-boost channel), propelled equities higher, sent bonds tumbling and supported the USD.

Can the trade extend though?

Warning against backing the Dollar unconditionally is Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London who says he is not fully convinced the 'Trump trade' is a sure-fire bet.

"We believe uncertainty remains firmly in place, and as investors try to assess the political route Mr. Trump will take, the market will be subject to larger-than-usual intraday swings and
volatility. Fundamentally, we remain bearish on the USD, as we believe its current level cannot be justified by real rate differentials."

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