GBP/USD forecast - page 34
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Pound to Dollar: LS Trader's Seaton says Momentum Studies Advocate for More Near-Term Upside
Technical traders often rely on the old mantra that the "trend is your friend" - if this is indeed the case then bet on further GBP/USD upside in the near-term.
Pound Sterling has been rising against the US Dollar since October and has in the process built some decent momentum over the near-term period.
Generally we would define near-term as encompassing 3-4 weeks and would base studies over this period using a currency pair's daily charts.
Trend analyst Phil Seaton from LS Trader says that based on momentum alone we could expect further advances over coming days and weeks.
“The British Pound has made a short-term breakout to the upside from an extremely narrow trading range and low volatility environment. The rally has been supported by a break above 60 on the RSI and a couple of above average volume days,” says Seaton.
Seaton believes that success in forecasting a currency’s move, and therefore profiting on such a move, is best done by studying its trend.
There are some set rules that define whether a trend is in place; if confirmed then the we should anticipate the financial asset to follow the path of least resistance.
The ability to set and follow rules tends to make for a more objective approach to analysing currency movements and therefore minimises the human error element in forecasting.
Accordingly, in the case of Pound-Dollar, Seaton reckons the trend is higher according to the daily charts.
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GBP/USD rose by 0.12% to 1.2641, near a nine-week high at 1.2776 on Tuesday.
Time to Re-Sell Sterling, Says Société Generale’s Tan
The Pound to US Dollar pair is rolling over and providing traders with the perfect selling opportunity argues the Soc Gen analyst.
The time is ripe to ‘fade’ the GBP/USD pair says London-based Soc Gen analyst Alvin Tan.
‘Fading’ is a trading term which means taking a trading position which is contrary to the dominant trend.
By advocating fading GBP/USD, Tan means selling the pair, which has been in a strong uptrend since recovering the day after the October flash crash lows.
His recommendation is to sell the pair at 1.2615 with a target at 1.2150 and a stop loss at 1.2890.
Stop losses automatically close trades out if they go in the opposite direction to that expected so that their losses can be controlled.
Short-Covering Rally Spent
The period of “short-covering” which followed the October lows may now have run its course, reasons Tan, making the pair more vulnerable to a reversal lower.
“Short-covering” is a phenomenon whereby an asset starts rallying strongly from an oversold low.
It happens when many traders are in a short position on the same asset – which means a trading position which profits if the asset falls – and the asset suddenly starts going up in value.
When this happens, it can result in a panic closing of short positions as traders get worried about their positions making a loss.
The result is that the rally actually gains upward momentum.
Although Tan sees the ‘short-covering’ effect as wearing off, he still sees further upside as a risk, given the still-high net balance of bearish short positions on the pair.
“The key risks are: 1) the still large net short speculative position in sterling,” comments Tan in a proviso on the risks to the trade recommendation.
If these are closed rapidly they will fuel a rebound.
Yield Spread Diverging
A further rationale for selling the pair, according to Tan, is the widening divergence between the UK/US 3-year bond yield spread and the GBP/USD exchange rate.
Normally the two move in tandem with each other but lately the exchange rate has risen whilst the spread has fallen.
This is a sign that the exchange rate has become disengaged from fundamentals.
“UK-US interest rate differentials have continued to decline, and point to renewed cable weakness ahead,” remarks Tan.
Risk of Hard Brexit
Soc Gen see one possible risk factor of the trade failing as the UK Supreme Court deciding to allow the prime minister the prerogative power to dispense Brexit without the input of Parliament.
The Law Lords deciding on the case will publish their decision at the start of January.
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Blind Leading the Blind: “GBP Remains a Consensus Short” But Euro-Related Political Risks Outweigh
The Pound is going down but the Euro is going even lower, says Bank of America Merrill Lynch’s Head of FX Strategy David Woo.
“Our baseline projections expect GBP/USD to hit a new low of 1.15 in Q1 after the UK activates Article 50,” says David Woo in a recent report.
Yet despite seeing Sterling revisiting the flash crash lows versus the Dollar because of Article 50, his view on the Euro to Pound pair is very different.
“We recommend selling EUR/GBP via a 6M 0.84/0.80 put spread, to capture both the referendum in Italy and the French elections, but also give time for GBP to recover in case it weakens further following activation of Article 50 in Q1. The structure costs 1.07% EUR,” says Woo.
A ‘put spread’ is a type of option’s strategy used when a trader expects a decline in the price of the underlying asset.
In this case, the expectations is for a decline in EUR/GBP to below 0.80 as that is the level below which the strategy will pay out.
Yet what could explain the seemingly monstrously wide divergence between Woo’s forecasts for GBP/USD and EUR/GBP?
In two words “political risk”.
Woo sees this as dominating Europe in the year ahead as many key elections have the potential of resulting in a rise of far-right populist parties and the possible dismantling of the European Union.
“We expect markets to become more concerned about political tail risks in the rest of Europe following Trump’s victory in the US elections.
“Political risks in Italy and France could question the sustainability of the Eurozone, thus weakening EUR/GBP,” says Woo.
Analysis of Political Risks
Woo sees the two main sources of risk for the Euro as emanating from elections in Italy (which have already passed) and France.
The Italian referendum led to a win for the “No” camp which rejected the idea of reforming the upper house, or Senate, and reducing its power.
Prime Minister Matteo Renzi, who had supported the “Yes” campaign resigned after the referendum.
According to Woo, this should have weakened the Euro due to increasing fears of a snap election opening the way for a win for the anti-Euro Five Star party.
However, this was not the case as the Euro strengthened following the referendum and the news of Renzi’s departure.
Nevertheless, even without a snap election, Woo points out how markets could still become jittery prior to an early 2018 election.
As for the French Presidential election, Woo sees an outside chance of Le Pen making a surprise win a la Trump:
“The 2017 French election is another concern. President of the far-right party and presidential candidate Marine Le Pen is ahead in the polls to win the first round.
“Winning the second round is much more difficult, as she will need more than 50% of the votes, but investors could start to expect the unexpected after being blindsided in the UK and the US,” writes the BOFAML strategist.
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The British Pound to Remain Strong into Year-End say Credit Suisse, More Optimistic About Trajectory in 2017
Credit Suisse believe Pound Sterling's potential for sharp declines in 2016 and 2017 have faded but beware potential volatility in January.
The Pound could remain around recent ranges through to the end of 2016 argue analysts at Switzerland's Credit Suisse.
In a month that saw Donal Trump win the US election and trigger a rally in the US Dollar (index) to 12-year highs, one of the few currencies which actually beat the Dollar, was the Pound.
The strength some by surprise, particularly those market-watchers who reckoned it was a one-way ticket into oblivion for a country that would face terminal decline owing to its decision to exit the European Union.
Of course that view is a misguided one and what we have learnt is that Sterling was left looking oversold as the UK economy will actually remain afloat over coming years.
FX Strategist Bhaveer Shah, at Credit Suisse's London office, argues that the Brexit story - or rather politics in general - is unlikely to worry the Pound over the course of the remainder of 2016.
"With this week’s UK Supreme Court hearing generating ample noise, one obvious factor that may have helped the pound in recent weeks is the perception that the dial has shifted somewhat away from a hard-Brexit scenario," says Shah.
The Pound weakened to its 1.1450 lows in October due to fears the government was going to trigger a hard-Brexit which would bring the UK out of both the EU and the common market, which is the EU’s trading club.
Shah notes how concerns have softened recently and this has given Sterling a boost.
“Indeed, the tone of the conversation does seem to have softened a notch from the extremes of October, with attention shifting to technicalities that might delay or soften Brexit,” says Shah.
One such technicality is whether the UK might still legitimately claim to have access to the single market via Article 127, even in the event of article 50 being triggered.
Another technicality is whether Parliament can have a say on Brexit, which is being deliberated in the law courts at the moment.
“As long as the door is sufficiently ajar to such possibilities, however slim, we believe GBP may remain supported,” says Shah.
For Credit Suisse the outlook for the Pound rests with what can be explained as a Brexit dial characterised by hard-Brexit on the one side and soft-Brexit on the other.
Where the dial lands is where the Pound should find its new fair value.
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