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GBPUSD Forecast: Is GBP rally on Brexit optimism overdone?


Update Jan 28th: Price reached our first intraday target at 1.31500. We book some profit and move stop loss to entry.

As we have mentioned in our previous GBPUSD forecasts, Sterling continues to climb higher. Our second short term target was 1.31730 and Cable ended the week at 1.31970.

If you are not a new visitor of Chartreaderpro.com, you should know our view of Sterling.

We were insisting on buying GBP against all major and minor currencies. Our reasons were quite clear.

Before the Brexit Vote in UK Parliament, I have published my scenario:

FX scenarios:

Markets consensus suggest GBPUSD could trade below 1.27 but find buyers ahead of 1.2615. A narrow defeat would boost hopes that eventual passage is still possible and could see spot rally toward 1.32. 

BoE is ready to go rate hikes as soon as Brexit uncertainty fades ous. I have published the reasons on November 24th GBP forecast.

Much more important is the BoE’s interest rates policy. The Brexit agreement will eliminate economic uncertainty and messages from BOE suggest that interest rate increases will begin after the agreement. Carney will probably have to tighten policy and a yield spike could be on the way. The pullback in market pricing shows that traders are focused on the growth risk from Brexit but they’re underestimating the potential impact on inflation due to factors such as currency weakness, higher import costs and reduced immigration.

The BOE is unlikely to significantly downgrade its growth outlook in its next set of economic forecasts. I beleive  that intermediate-maturity U.K. yields will rise relative to those in the U.S., because the BOE doesn’t have the same luxury of putting hikes on hold that the Fed has — especially if the Sterling continues to slide.

“Deal” or “no deal”… Further rate hikes can become a “must” near term.

To be much more simpler and clear : BoE wants and needs strong Sterling. 

What do we have ahead?

  • Brexit hopes backed by the DUP party’s support for a “Plan B” for Brexit pushed Sterling to a fresh 11-week high of 1.32170.
  • The Brexit “Plan B” will go to the UK House of Commons for a vote in the upcoming week.
  • The US government shutdown will see the first quarter GDP estimate delayed, while the Federal Reserve meeting and the US NFP and Unemployment  headline the upcoming week.

According to an article in Bloomberg, the pound’s world-beating rally is unsustainable as traders are over-optimistic about the way forward on Brexit, according to money managers.

There are downside risks according to Bloomberg’s article:

One of the amendments to Prime Minister Theresa May’s deal gaining traction among members of Parliament aims to delay Brexit beyond the March 29 deadline and avoid a chaotic no-deal. The chances of getting the amendments through the House of Commons depend on how May and Labour leader Jeremy Corbyn instruct their MPs to vote.

Downside Risks

If none of the amendments pass, May will be left once again with a deal that lacks enough support and no viable alternative option. The current impasse is likely to drag on, meaning risks for the pound are tilted to the downside, according to Mark Dowding, a money manager at BlueBay Asset Management LLP.

He sees Brexit ultimately being overturned following a second referendum, but before then sees the pound weakening as the March deadline approaches. “I’m doubtful much happens until March,” said Dowding. “There may be a majority for no hard Brexit, but unless something else is actually agreed, this is the de facto position come March 29.”

That is not a secret. There are risks downside. But Sterling is still cheap. And BoE does not want cheap/weak sterling.

Personally, my year-end target of GBPUSD is above 1.36000. The first level to be broken is 1.34500. That will be the midterm trend reversal.

If we look at the matter technically, On the bigger charts, Cable ended the week above SMA 200 on the Daily Chart.

GBPUSD Daily chart

The wedge is broken. The next midterm targets of the pair 1.33000 and 1.34500 as long as it stays above 1.28900 support.

On the smaller chart timeframes, we see the signs of a bearish correction shortterm.

RSI is making lower highs and sending bearish divergence signals.

A bearish shark pattern is almost completed. 

Monday, the pair is likely to retest 1.32400 resistance. If the Bulls fail to break above, we may see the pair drawing back to 1.31200. 

Intraday Traders may try short at 1.32 – 1.3220 targeting 1.31500, 1.3100 and 1.30670. Stop Loss above 1.32500.

 

Those potential pullbacks can be used as buying opportunity targeting 1.34500 midterm.

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DISCLAIMER: This is a technical analysis study, not advice or recommendation to invest money

GBPUSD: Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. Chartreaderpro does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility

 
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