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Elevated GBP/USD Can Probably Go Higher Yet

Elevated GBP/USD Can Probably Go Higher Yet

David Cottle, Analyst

DailyFX Quarterly Forecasts have been updated for Q2 and are available here

The UK Pound has climbed to highs against the US Dollar not seen since 2016’s seismic referendum on British membership of the European Union.

Elevated GBP/USD Can Probably Go Higher Yet

There are many macro factors behind its rise, from a broad revival in global risk appetite, the UK’s economic resilience to Brexit uncertainty and rising expectations of higher interest rates from the Bank of England. Its monetary policy committee meets next on May 10, with inflation still above its 2% target and signs of life in wage growth.

But has elevated GBP/USD got any more to give? Well, according to IG’s sentiment indicator, the market is still skewed hugely to the short side. At last look, 70% of participants were there, with only 30% long. This is the sort of skew which can make a good contrarian indicator and which we can expect to see change in short order if this week’s heavyweight UK data hold up.

CRACKS HAVE APPEARED IN THE EUROZONE RECOVERY

Of course, there are some darker clouds ahead. For example are signs that the Eurozone’s impressive boom is cracking. Industrial production has now fallen for three straight months. If the coming data underscore this it’s bad news for the UK’s biggest export market, even if the UK cycle doesn’t turn with the EU’s, and it will might.

It may also mean that, even if another rate hike is delivered by the BoE, suspicions will grow that there may not be any, or many, more. Brexit won’t insulate the UK completely from events across the English Channel and, at any rate, it hasn’t happened yet. It is also unlikely that negotiations will remain as benign an influence on sterling as they have been in the recent past.

There will come a time for a rethink on GBP/USD, in which gravity will probably play a part. But the Pound can probably ride this uptrend a little higher yet, especially if the US corporate earnings season lives up to increasingly rosy expectations and keeps risk appetite brisk. The pair is starting to look a little overbought on its daily chart, which shouldn't surprise anyone given its recent vigor. If the bulls can consolidate around current levels then more gains could well be seen towards the high $.143s and even into the $1.44 handle

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Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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