GBP – Stimulus during tightening

The pound fell on Monday as tax relief increased due to the island’s crisis.

Investor confidence in sterling has been undermined by expectations that the UK’s public debt is now on a precarious upward trajectory, while the country still runs a gaping current account deficit.

If these huge moves continue, the Bank of England will need to raise interest rates, perhaps by 1 percentage point, to try to stabilize the pound.

Technically, the break of the medium-term ascending channel creates prospects for new record lows in the pound. In the Asian session, the sell-off pushed the pound to the edge of the wide range in the 1.082 – 1.069 zone, a key level, a breach of which would create prospects for eventual parity with the euro.

Today, the day is filled with ECB and FOMC outpourings, which is likely to cause volatility in the markets. If the statements are more hawkish, the pound is likely to drop again for a test of the 1.0805 level, where I expect it to hold for a while before making a corrective move. In support of this, Sequential printed a 2, suggesting there is still room to move down. The DeMarker Oscillator made a failed attempt at an Oversold bounce, highlighting the pound’s weakness against the euro.

The lack of significant economic data from the island creates a lack of potential support at this time, which means that movements are entirely dependent on the performance of other currencies.

On the bigger picture, 1W Chart, the sharp decline reinforces the possibility that the historical support 1.082 – 1.069 will be broken. In support of this, the Sequential has printed a 6 which suggests at least 3 more weeks of downward movement, and the DeMarker Oscillator is entering Oversold territory which is considered a negative signal foretelling more losses.

Bank forecasts are for these levels to hold until the end of the year and for the pound to continue to decline in Q2 next year.

Expectations for Q4 are distributed at most to 0.86 euro per pound and the adjacent levels 0.87 – 0.85, which for the moment does not correspond with the technical actions.

The weekly forecast suggests a wide range between 0.886 – 0.940 but the consensus estimates for now are outside the range around with the highest price estimate at 0.857. This would only happen if the ECB and the Fed soften the tone and the data on the Gross Domestic Product of England comes out better than expected, which is unlikely for now.

There is currently no good positioning point for the pound euro pair, but with a potential correction to the 1.152 / 1.142 levels, a short position is possible for a retest of the bottom 1.082 – 1.069 of the wide range.

Alternatively, a break of the 1.152 / 1.142 resistance will trigger stop loss orders and give a chance to test the recent highs 1.20 / 1.22.

We place the stop loss zone above 1.152 / 1.142 measured against the size of the margin account.

 Dealer Anatoliy Pavlov

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