Is Investor Sentiment Improving for the GBP?
Sterling Gains Momentum Heading into March
An interesting trend has been developing in 2016: the GBP/USD pair has stabilized in a tight trading range between 1.24 and 1.26. This is remarkable given the shock drops that the sterling was subjected to post-Brexit. The recent performance of the GBP has led many to speculate that the pound may have bottomed out against the greenback. Recall that the GBP/USD pair hit a low of 1.1983 against the greenback on 15 January 2017, and it has rebounded strongly since. In fact, we can extrapolate even further back to October 2015 to see the longer-term trend that has developed with the sterling. The trading range is certainly trending higher, despite the Brexit uncertainty. This is important for FX traders on multiple fronts: bank notes for 1, 3, 6 and 12-month structures have all rallied since January 2017, and this is reflective of positive sentiment for the sterling.
Lloyds Bank Gives Thumbs up to Pound Bulls
Analysts from the commercial banking division of Lloyds Bank have given the green light to the GBP in a letter inked to clients recently. That the GBP has been one of the worst performing G10 currencies of 2016, and early 2017 is notable. The GBP has been trading in a range between 1.22 and 1.26 for several months, but this represents a stabilization of the currency. The GBP/USD pair rallied to a high of 1.2706 at the start of the month, and this generated significant optimism among traders. The good news is that the sterling is undervalued; the bad news is that more short-term weakness is coming. According to Lloyds Bank, the GBP/USD pair will likely remain in a tight trading range between 1.20 and 1.28. Every time the GBP gains momentum, we can expect profit-taking to kick in and drive the exchange rate lower. Overall though, the GBP/USD pair has a net-short outlook.
In terms of future guidance for the GBP/USD pair, a critical level to watch is 1.2500. Now that the GBP/USD is trading fractionally above that level, there is further upside potential. Any move beneath that critical resistance level will see the GBP/USD trading in a tight range between 1.2345 – 1.2410. The resistance level that we are looking at is likely 1.2500 – 1.2570. From a bearish perspective, any move beneath 1.2410 could reveal a much lower trading range of 1.2250 – 1.2350. For the Sterling Bulls however Lloyds Bank remains confident that short-term optimism is in the offing. The 12-month best exchange rate for the GBP/USD pair is 1.5016. On the flipside of the equation is the USD. That the greenback has been unable to rally of late is significant. Recall that US economic data releases have been positive in recent weeks, except for real wage growth.
Bullish Prospects for the USD Outweigh GBP Strengths
Of course, the biggest driver of USD strength is the Federal Reserve Bank. The Fed and its FOMC members set the federal funds rate which has the strongest impact on the USD. While several Fed presidents have called for an interest rate hike recently, the consensus from the top – Stanley Fischer and Janet Yellen has been less hawkish. Perhaps it is this lack of hawkishness that has weakened the USD. For the most part, the long-term projections for the greenback remain bullish. There are several strong drivers of bullish sentiment, including a potentially massive fiscal stimulus, up to 3 rate hikes, and the strong performance of the US economy. Barring an equally impressive performance from the UK economy, the GBP/USD pair will trend lower as the year progresses.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.