Possible rate hike back on the Federal Reserve's agenda

US Dollar Highlights

  • Pound still suffering from the uncertainty over the Brexit vote

  • Possible rate hike back on the Federal Reserve's agenda

 

Sterling - US Dollar (GBPUSD) FX Technical Analysis

Sterling has been trading in a well-defined trading range of 1.3000-1.3300 for most of July. Post-Brexit, the Pound has not found many new friends and it was always going to struggle to maintain any significant rallies as markets begin to adjust to the new paradigm. As Theresa May and the Conservative party delay triggering article 50 until at least early 2017, businesses are reluctant to make long term decisions without understanding what our relationship with Eurozone will look like. This is causing uncertainty which is set to continue for the foreseeable future.

The short squeeze we saw in June was always likely to be short lived. In July, Mark Carney and the MPC cut rates by 0.25% and announced further stimulus in the form of additional Quantitative Easing by buying both gilts and corporate bonds. Growth and inflation was also downgraded and they stated that they would be prepared to do more if the economic situation deteriorated.

Considering that the UK is running a massive balance of payments deficit, it is unsurprising that the Bank of England seem pretty comfortable with a weaker Pound, seeing it as a mechanism for boosting growth through higher exports. It's a policy of benign neglect towards the Pound and it is hard to see why any currency will make significant gains in the short term.

Strong jobs growth in the United States has compounded the Pound's fall as it has now put interest rate hikes this year firmly back on the Federal Reserve's agenda. Investors are predicting that increased divergence in monetary policy can only weigh further on the Pound. For now any rally will be short lived.

Buyers

The Pound is now not as oversold as it has been over the last couple of months as markets stabilise over the summer. 1.3100 is initial resistance followed by stronger longer term resistance at 1.3300. I would not suggest targeting any higher than that at the moment.

Sellers

There may well be some more room for the Pound to sink further. Current levels are fairly attractive for short term sellers however if you have more time I would suggest leaving protection above 1.33 or 1.35 if you have deeper pockets looking for a test of low 1.20's.

GBPUSD

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