Latest research report released by Lloyds Commercial Bank suggests the GBP to USD should experience notable upside over coming weeks and months.
- Lloyds make the argument for a fundamental move higher in GBP/USD. Levels above 1.50 seen
- Market structuring suggest more weakness though, should a key level break it should be seen as a signal of a more negative outlook from our point of view.
The pound is seen holding ground just above 1.44 as recent weakness fades.
The initial shift in global risk sentiment in recent months (from bearish to tentatively neutral) has been a positive driver for GBP with studies suggesting it accounts for more than half of April’s recovery.
But signs of a stabilisation in risk appetite, as opposed to new found optimism, means that this supportive driver of the British pound is beginning to fade.
Add to this softer UK economic data, the uncertainty surrounding the June 23rd referendum and increasing confidence that the US Federal Reserve will raise interest rates over coming months and it is hard to get excited about the pound-dollar's prospects.
Lloyds: Sustained Recovery Through Remainder of 2016
New research from Lloyds Commercial Banking suggests that ultimately the GBP will head to higher levels.
Analysts at Lloyds have told clients they are forecasting the pound to push higher over coming weeks and months.
The positive forecast is partially based on the Lloyds FX team’s central expectation that the dollar will weaken as a result of the Federal Reserve delaying when they will raise interest rates, from June to September.
We have already mentioned a pro-USD impetus being provided by increased market bets for an interest rate rise at the Fed, but what Lloyds are hinting at is disappointment on this front.
“Over the coming months, the USD may be susceptible to a broader based reversal, particularly if, as we expect, the Fed leaves rates unchanged in June and global risk sentiment continues to improve. This partly informs our medium term forecast of a move in GBP/USD back above 1.50.” Writes report author Adam Chester, Head of Economics at Lloyds.
The pound gained ground in April after increased support for the Remain camp in the EU membership referendum led to the pound recouping some of its previous Brexit losses.
The pair rallied to 1.4770 on the basis of polls which suggested the stay camp was pulling substantially into the lead, and after bookies increased their odds of the UK staying in the EU to 75%.
Commentary from Fed officials suggesting a June rate hike was still a possibility, however, led to a resurgence in the dollar, which pulled the GBP/USD rate back down to the 1.43s in a matter of hours.
Whilst it now appears the market may have overreacted to this commentary – neither of the two officials are voting members so their words carry less weight – the remain vote's lead in referendum polls also seems to have waned, with the two camps now closer (46% stay to 43% leave according to the latest Financial Times Brexit Poll Tracker), keeping GBP/USD at subdued levels.
Lloyd’s are aware of the potential for the pair to be subject to much volatility in either direction in the run up to the referendum:
“For now however, ongoing EU-related uncertainty is likely to continue to dominate price action. GBP volatility is likely to remain high, with recent EU referendum polls indicating the outcome remains close with a high percentage of voters still undecided.”
From a technical perspective the pair appears to have formed a very clear and compelling bottom pattern, which looks in many ways like an inverse head and shoulders (H&S) reversal pattern. This would suggest higher prices to come. Indeed its difficult to envisage more downside from current chart patterning.
Lloyds forecast the pound sterling to appreciate to 1.5000 to the dollar by the summer, from a current rate of 1.4444.
Pound to Struggle: The Counter-Argument
However, other analysts are less bullish, holding mainly outright bearish or neutral views.
Commerzbank highlight support at 1.4370, which comes from the upper border of a triangle.
We too think this level is significant but see it as the slanting neckline of an inverse H&S pattern.
If broken it is likely to be a bearish signal, and would signal more negative outlook from our point of view.
Lloyds’s Robin Wilkins also picks up on this key level in his daily FXpresso note:
“The market has pulled back to test important pivot support in the 1.4375/65 region, with further pressure on this area this morning.”
However, he sees momentum now to the downside after the capitulation following the 1.4770 peak:
“The impulsive reversal after spiking up to 1.4770 leaves the technical outlook biased to the downside, with a decline here suggesting a move to the 1.4150 channel support.”
Medium-term he sees a neutral range evolving around 1.42, and a break above 1.50 signalling a possible reversal in trend:
“A move up through 1.50 is needed to confirm the 30-year support in the 1.40-1.35 has again held and a gradual move back towards 1.60/1.65 will be seen in the long-term.”
Online lender Swissquote see the pair at the bottom border of a rising channel, with a decisive break below the lower border at 1.4410 opening the way lower, to “hourly support” at 1.4300.
They remain bearish long-term:
“The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average)”
Although they do end their note with the 'coda' that generally oversold conditions favour a rebound.