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GBP/USD chipping away at 30yr support

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - GBP/USD has been a bad performer and has lost a tremendous amount of ground while the Brexit concerns among mixed data, massive account deficit and the out-pricing of a rate hike from the BoE have all weighed on the pound during a risk averse period that has abandoned UK assets.

    The price has collapsed from the consolidation around the 1.53 handle and plummeted almost 10 cents since the middle of November business with little two way action the way down. We are now trading at the lowest levels since June 2010.

    So now where for GBP/USD?

    Well, the Brexit scenario will certainly continue to weigh on the pound, especially as the media ramp up the hype over the coming months. "How the ‘Brexit' risk premium evolves going forward will be very much linked to the ebb and flow of opinion polls. That was highlighted by the Scottish referendum in September 2014 which was an irrelevance for the markets until opinion polls suddenly shifted toward a vote for independence around 3 weeks prior to the vote," explained analyst at BTMU.

    Another major factor in the pound is the massive account deficit. "The current account deficit totalled GBP 86.7bn in the four quarters to Q3 2015, some 4.7% of GDP. However, the total net FDI inflow in the same period amounted to GBP 84.8bn, effectively entirely financing the deficit. That FDI net inflow may well now diminish along with portfolio inflows and we certainly see the prospect of GBP/USD falling below the 1.4000 level temporarily as opinion polls sway back and forth." explained the analyst at BTMU. However, they finished on a positive note, "Prospects for the pound will improve dramatically post- referendum assuming the UK votes to remain in the EU (our current view). That would pave the way for a BOE rate hike in August and a rebound in GBP/USD back above the 1.5000 level. Our year-end target is 1.5600."

    GBP/USD levels

    Technically, GBP/USD is eroding the 30 year trend line support having scored below 1.4385 in recent trade. A break of 1.4350 would be significant and tally up with the analysts at BTMU's outlook. Karen Jones, chief analyst at Commerzbank explained, "We noted the 13 count and the TD perfected set up on the daily chart and favour a small near term rebound. Directly above the market lies the accelerated downtrend at 1.4588, in order to alleviate downside pressure, a close above here will be needed."
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