Strategists will look to continue chasing the GBP to USD exchange rate higher but there is also evidence that suggests the pair is already overvalued.
Despite referendum fears threatening to bring sterling back down again after recent polls showed the outcome is by no means guaranteed, market technicians remain bullish cable after the pair broke above key highs.
Commerzbank’s Karen Jones sees the move above the 1.4665 level as opening the gates to a move up to the next target at the 200-day moving average at 1.4777. Moving averages often present obstacles to price as they attract counter-trend sellers (in an up-trend) hoping to profit from the pull-back which often follows a first touch.
The analyst also mentions a ’13 count’ on the 60 minute chart which is a reference to demark indicators, which measure exhaustion - 13 represents the end of a trend; in this case the up-trend.
“GBP/USD has eroded the 1.4665 February high leaving the market well placed to challenge 1.4777, the 200 day ma, we suspect that this will know the initial test – we note the 13 count on the 60 minute chart. The outlook is bullish, the upside measured target from the triangle is 1.5085.
“We would tighten up stops on longs given how close we are to initial target. Intraday dips should hold 1.4600. Only on a close below 1.4330 will the chart picture start to deteriorate to leave the 1.4210 2 month uptrend exposed.”
Robin Wilkin’s author of Lloyds Commercial Banking’s daily ‘Fxpresso’ concurs with Jone’s bullish stance:
“With the broader USD looking set to develop a correction phase the risk is this rate could push up to test the 1.48-1.4950 key resistance region, after breaking 1.4675 yesterday. A drop back through 1.4575/50 is needed to negate this new near term bull dynamic and re-open the potential for a move back towards 1.4350/1.4300.”
Longer-term he is more sanguine though, arguing that the pair may end up in a range:
“Medium-term we still believe the market should remain in a range between 1.4050/1.3980 (1.35 key below there) and the 1.48-1.4950 region.”
A break above one dollar fifty is the ‘pamplona point’ required to get everyone running with the bulls:
“A move up through 1.50 is needed to suggest the 30-year support in the 1.40-1.35 has again held and technical analysis would look for a gradual move back towards the 1.60/1.65 over the longer term. “
Meanwhile, Yann Quelann technical strategist of online broker Swissquote says of GBP/USD that it will also go higher:
“Expected to show continued strengthening toward resistance at 1.4770.”
However, longer-term he is not so upbeat:
“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).”
With the proviso, however, that, “the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.”
British Pound Could Now be Overvalued Against the Dollar
The analysts mentioned above are technicians - it is their job to study the charts and make calls on how the underlying market is structured.
Of course, this is an incredibly useful area of forecasting that needs no introduction.
However, those with an eye on the market should be aware that there is a good amount of research out there that suggests a big move lower is possible.
Take a look at the below relationship between the GBP/USD and UK/US interest rates:
Typically GBP/USD and the interest rate differential tend to track each other.
This was the case until 'Brexit panic' set in and drove a wedge between fair value and reality at the end of 2015.
Importantly though, the gap is now all but closed suggesting there is very little Brexit premium to be recouped.
Indeed, the GBP/USD is actually overvalued!
We would urge caution on chasing sterling higher based on these observations.