Written by Joaquin Monfort
Sterling continues to weaken versus the Dollar, unable to escape the ‘larger’ currency’s “gravitational pull”, says Scotiabank’s FX Strategist Shaun Osborne, who sees more downside on the horizon for the pair.
“Daily/weekly price action looks negative, as the recovery from early October has broken down and trend strength indicators are bearishly aligned across short, medium and long-term oscillator signals—this typically means limited scope for gains and more losses ahead,” said the Scotiabank Strategist, who advised traders to, “fade GBPUSD rallies,” in his note.
Osborne sees the pair falling to a target at 1.2000 eventually.
We also see more downside, with a break below 1.2200 confirming more downside to an initial target at 1.2100.
Supporting the bearish view is the MACD, which has crossed below both its signal line and the zero-line and is providing a bearish signal.
Elliot Wave 5 Down
According to a form of cycle analysis called Elliot wave analysis, the exchange rate could be in a final wave lower.
J P Morgan published such an analysis in October and appears to have been unerringly accurate in describing the pair’s trajectory so far.
J P Morgan’s analysis posits the move down which ended at the October post-tory-party conference ‘Hard’ Brexit lows, as a wave 3, and the recovery since then up to 1.2770 as a wave 4 (see chart below).
They predicted the end of wave 4 in the 1.2650 – 1.2800 zone, which has so far been quite accurate given the early December peak was at 1.2770.
It is now possible that wave 5 is moving down with an eventual medium-term target at the October lows at 1.1450, assuming their analysis is correct.
Wave 5’s are the final impulse waves in the longer term trend.
Wider UK Current Account Deficit Weighs
Recent data has been mixed for the Pound.
UK third quarter GDP data was revised up at the final estimate to 0.6% from the 0.5% previous estimate, and whilst this was a positive sign, especially in the face if Brexit headwinds, it was offset by a widening Current Account deficit during Q3.
The Dollar, meanwhile, continues to rise in expectations of further interest rate hikes by the Federal Reserve in 2017.
A further boost to the Dollar comes from firming expectations of more fiscal stimulus from the President-elect Donal Trump, who currently appears to be backing up his earlier pre-election spending promises, suggesting the policies will not be watered down now he has gained office.
Data for the Pound
The main data release for the Pound this week is the British Banking Association’s data on Mortgage Approvals, which is forecast to show a rise to 41.6k in the month of November from 40.3k in October.
Data for the Dollar
Data for the Dollar kicks off with the S&P Case-Shiller House Price Index in October, at 14.00 (GMT) on Tuesday, December 27, which is forecast to rise by 0.5% month-on-month and 5.1% year-on-year.
Given some analysts are calling for a slowdown in housing in 2017any property-related releases may be the subject of more scrutiny than usual.
On Wednesday, December 28 we have more housing data, first the shape of MBA Mortgage Applications at 12.00 and then Pending Home Sales at 15.00, which are supposed to show a 0.5% rise month-on-month in November.
On Thursday, there is the Advanced Trade Balance in November at 13.30.
Also on Thursday at the same time are Jobless Claims for the week ending December 24, which are supposed to show a 277k rise.
EIA Crude Oil Stocks are released at 16.00 on Thursday and forecast fall to -0.3m barrels, in week ending December 23.
Finally, on Friday, Chicago PMI’s are released and expected to fall to 56.8 in December, at 14.45.
This is then followed by the Baker Hughes Oil Rig Count at 18.00.