Pound to Dollar Exchange Rate Falls After Yellen Talks Up US Employment Sector

The GBP/USD pair is trading at 1.2387.

The Pound to Dollar pair fell on Tuesday morning after positive commentary from Janet Yellen on Monday helped support the Dollar side of the pair more than the Pound.

Yellen said that although job seekers still faced challenges the jobs market was the strongest it has been for decades.

She cited the 4.6% unemployment rate - a pre-recession low - and rising wages as two positive signs. 

Job prospects and career opportunities for graduates were, "very good", added Yellen, who was receiving an honorary doctorate from the University of Baltimore when she made the remarks.

The Fed Chair's stronger dollar outlook chimes with J P Morgan's bearish forecast for GBP/USD this week.

In their FX Markets Weekly, Head of FX Strategy John Normand said they are keeping their bearish short position on GBP/USD open.

A ‘short’ position is one which profits from the exchange rate falling; a long, profits from it rising.  

The rationale for their trade is that GBP/USD is artificially high and therefore at greater risk of a pull-back.

It is artificially high because of ‘short-covering’, which is the process by which the majority of traders find themselves short a falling asset, which suddenly bottoms and starts to rise.

As the recovery extends the short-sellers start to panic and close their losing positions, adding upward momentum to the rally.

Normand expects the short-covering to dissipate eventually, allowing the Dollar’s stronger fundamentals to shine through and push GBP/USD back down again (the exchange rate is always quoted in the currency of the first half of the pair, ie GBP for GBP/USD, so stronger Dollar = lower GBP/USD).

“Cable has been our sole USD-long in G10.

“Unfortunately, it’s also virtually the only dollar-pair (aside from CAD) to have resisted the post-Trump re-pricing of the US economy and the broad dollar.

“The resilience of cable is mainly attributed to the sizeable overhang of GBP shorts and a continued news vacuum around Brexit pending the Supreme Court's verdict on the Article 50 process sometime in early January.”

Technical Picture

The path of least resistance from a technical POV is down – in some ways supporting J P Morgan’s short trade idea.

GBP/USD is currently at 1.2466 and pushing up against tough resistance from the R1 monthly pivot at 1.2475, which it is struggling to break above.

There is a possibility it will, and a move above 1.2600 would confirm an upside break with a target at 1.2700, however, the probabilities are marginally favouring a move lower instead. has broken down through a major trendline drawn from the October lows.

GBP/USD has broken down through a major trendline drawn from the October lows which is already a bearish sign.

The pair has formed a three-wave a-b-c correction which has just completed and although the assumption is for the uptrend to resume - there is also a high risk it will not and break below the end of the c-wave at a 1.2372 instead.

Such a move would indicate a change of peak and trough progression from higher to lower and a change of trend. .

It would also probably lead to an extension down to a target at 1.2275.

Supporting a bearish view is the MACD, which is crossing its signal line and providing a bearish signal.

Also, supporting the bearish view is the Elliot Wave analysis (also from J P Morgan back in October), which points to a probable wave 5 beginning at the current level, in the direction of the broader downtrend.

Wave 5 would then be expected to take the exchange rate from its current level down to near the 1.1450 flash crash lows.