GBPUSD: Mind the Gap

The pound is among a handful of assets defying the strength of the dollar with GBP/USD climbing higher for a third day. But will the rally lose steam here or are there more gains to come? From a fundamental point of view, it depends largely on these major events/themes: the strength of the US dollar, the level of safe haven demand from European investors for the pound and the outcome of the Scottish independence referendum. Let’s briefly take a look at these themes in turn.

Firstly, the US dollar is continuing to push higher as the market prepares for a first rate hike from the Federal Reserve in early 2015. Research from economists at the San Francisco Fed earlier this week suggested that investors may be underestimating the time and also the pace of US interest rates when they begin to rise. The comments provided fresh impetus for the dollar which not only caused pain for other currencies, but also the buck-denominated commodities too with crude oil, gold and silver hitting fresh multi month or year lows today. However with the lack of any major market moving data to support the USD, the risks are that the greenback may pull back slightly on profit-taking.

As for the pound is concerned, demand may come from European investors whose central banks have even looser monetary stances than the BoE. The ECB, for example, recently drove the deposit rates even further into negative territory and announced a number of other unconventional policies. The Danish central bank quickly followed suit and in Switzerland, the SNB is also considering going negative in order to defend that 1.20 floor. The UK thus remains an alternative safe haven where investors can at least expect some return on their investment with the base rates being 0.5%. This should help to support the GBP over the medium term.
Meanwhile a new poll from Daily Record/Survation released yesterday showed the “No” campaign was leading at 53% vs. 47 for Scottish independence. On top of this, several UK companies have warned that they would relocate their registered head offices to London if Scotland opted for independence. It is increasingly looking like the YouGov poll may have been an outlier after all. Should they vote “No” on September 18 then the pound should, in theory at least, find additional support.

Technical view

Meanwhile from a technical point of view, the Cable has already reached a key resistance area, namely 1.6250-1.6300, and so it may turn lower once again from here. This area was previously support and ties in with the 38.2% Fibonacci retracement level of the bull trend from 2013. What’s more, the gap that was created at the weekend also lies here. Typically when these types of gaps get ‘filled’, the next move tends to be in the original direction; for the Cable, this means south. As a result, a drop towards the 2014 low at 1.6050 that was hit yesterday could be on the cards once again. The next potential level of support is at 1.6000. As a well as a psychological level, this also ties in with the 50% retracement of the abovementioned price swing. If the GBP/USD closes below 1.6000 in the coming days then there’s potential for price to continue heading lower for the foreseeable future.
However, if the Cable manages to fill the gap fully and hold on to the gains on a daily closing basis then this short-covering rally may continue towards resistance at 1.6460 or 1.6485 – the latter being the 38.2% Fibonacci retracement level of the down move from the 2014 peak. The bulls can take heart from the fact the RSI has recovered from the extreme oversold level of sub 20 and is currently trying to climb above 30 and also a trend line. The RSI’s movement suggests there may be a bullish shift in momentum.