By Rob Samson
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Today's recovery will bode well for further gains in the currency as the bull trading pattern is confirmed.
We take a look at the sterling forecasts:
"Looking ahead, we retain a bearish view on GBP/USD. Although we are relatively upbeat on the prospects for UK growth, the unbalanced nature of the recovery and the highly stimulative stance of UK monetary policy leave the pound vulnerable, especially at these levels and with the Fed now tapering. We target $1.52 by end 2014. The challenges facing the euro area suggest the euro is also likely to weaken against the US dollar. Based on our view of EUR/USD, GBP/EUR is forecast to end 2014 little changed at 1.2."
"If DB’s forecast of lower oil prices materializes, this will provide further support for our stronger USD view. The Fed has tightened policy the year after the last 4 favorable ‘exogenous’ oil shocks. Historic precedent fits with current circumstances where lower oil prices help risky assets and the real economic recovery, such that initial Fed accommodation gives way to Fed tightening and a broadening of USD strength."
"Without the powerful fiscal headwind it faced in 2013, we expect the US economy to power ahead in 2014, which will support the dollar against sterling. Sticking to fundamentals, we believe economic conditions will remain challenging in the Eurozone despite recent signs of stabilisation. We therefore expect sterling to continue to appreciate against the euro with GBP/EUR rising into the mid 1.20s next year, towards its fair value."
"Pound traders will now turn to the UK Retail Sales report this Friday for next directional clue about the the UK economy. The last four releases from UK have missed their mark suggesting that the pace of growth may have peaked in Q4 of last year. If Friday's report confirms those suspicions then cable could drift lower testing the 1.6250 level by end of the week," warns Boris Schlossberg at BK Asset Management.
"Another reason for Sterling’s weakness could be that its performance is becoming more correlated with that of the USD because the UK recovery mirrors that in the US. Both have seen a fall in the unemployment rate in recent months - they are likely to see a withdrawal of easy policy sooner rather than later and both 10yr Gov bond yields appear to be moving in tandem."
"The pair dropped sharply yesterday confirming the negativity showing on momentum indicators. But trading remained limited above 1.6360 levels as the pair failed to break the key support level of the ascending channel. Therefore, based on the technical analysis, we expect a bullish rebound affected by the ascending channel and take into consideration the appropriate Risk/Reward ratio; we suggest buying the pair today.
"Of note, breaking 1.6320 indicates failing the upside move and breaching the ascending channel, therefore extending the downside move."
"Fresh selling materialised and downside should be limited as bullish conditions are in place. Support should hold at 1.6317. Resistance is at 1.6517 ahead of 1.6622." - UBS.
Not so - we are seeing recent gains held across much of the market. EUR/GBP is however looking stubborn, we would expect this to be the case for a while.
This could yet be a factor today warns UniCredit Bank:
"Broadly steady UK CPI data are not seen reversing yesterday’s GBP fall due to short-covering on both GBP-AUD and GBP-JPY. Cable and EUR-GBP may still trade below 1.64 and above 0.83, respectively."
"Today, CPI numbers will be a focus. The market is expecting inflationary pressures to have remained unchanged in December; however, our economists view slight upside risks to today’s print. In reality a stronger number will have little bearing on monetary policy as general inflation pressures remain contained and is unlikely to trigger a breach of the forward guidance 'knockouts’, this underlines the MPC's dovish tone.
"However, a firmer print will likely provide some support for sterling. A weak print on the other hand will likely weigh on GBP. The year’s low of 1.6337 will likely provide initial support. While the recent dip in GBP maybe a decent buying opportunity, our economists highlight downside risks to retail sales later this week."
"There are dangers on the horizon for the British pound in the form of the Bank of England. Analysts continue to speculate what actions will be taken to keep interest rates low for as long as possible.
"The most important development over the past month was the sharp fall in the unemployment rate: down to 7.4% in Aug-Oct, from 7.7% in May-Jul. The MPC will welcome this improvement, and the 250k new jobs that caused it, but not the effect that it has had on interest rate expectations.
"On the current trajectory, unemployment will reach the 7% forward guidance threshold in mid-2014 – two years earlier than initially expected. Markets are now anticipating the first rise in interest rates to occur in early 2015, which has helped push 10yr gilt yields back above 3%. We think the Bank of England (BoE) will try to rein in these expectations, possibly by lowering the unemployment threshold to 6.5%, or highlighting the other policy tools at its disposal."
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