Mohammed Amine Hiani Market Analyst at ADS Securities
Mohammed Amine Hiani Market Analyst at ADS Securities

Pound weakness can unwind in Q4

The British pound was the worst performer since the beginning of this year compared to G10 currencies. This drop intensifi ed after the U.K electorate voted in favour of a referendum to leave the EU. Meanwhile, Sterling fell by more than 13% against the U.S Dollar before finding a temporary low around 1.2798 level.

First Published: e-Forex Magazine 73 / Currency Clips / September, 2016

Pound weakness can unwind in Q4

The British pound was the worst performer since the beginning of this year compared to G10 currencies. This drop intensifi ed after the U.K electorate voted in favour of a referendum to leave the EU. Meanwhile, Sterling fell by more than 13% against the U.S Dollar before finding a temporary low around 1.2798 level.

In the wake of this decision, the Bank of England has decided during its last monetary policy meeting on August 4, to cut interest rates by 25bps to 0.25% and to expand asset purchases to a total of 435 billion pounds in order to provide additional stimulus to the economy.

Surprisingly, when looking at the post-Brexit economic situation, many fi gures have come out far higher than expectations, such as the Manufacturing and the construction sectors, along with retail sales data, the services, and the composite indicators.

Therefore, the demand for the British pound is likely to increase in the following weeks as traders may look to play a strong recovery scenario for the U.K economy in Q4. Moreover, the Bank of England is unlikely to take further stimulus decisions in the near future, as most central banks offi cials may decide to wait for the outcome of the next Fed meeting scheduled for September 21, before reviewing their upcoming monetary policy decisions.

If the Fed use a more dovish tone and keeps repeating that the date of the next interest rate hike will continue to be data dependent, then the U.S Dollar will be under pressure again, which may help GBP/USD to gain more ground in the coming days.

From a technical standpoint, the pair has begun to show some signs of reversal as prices failed to break below the 2016 low mentioned above, and has made a higher low at 1.2866. Moreover, we have seen a break attempt above the consolidation triangle in the daily chart, which is likely to clear the path for another rally in the coming days if a daily close above the 1.3270 resistance zone happens. In extension, 1.3370 should be the next level of interest followed by 1.3480/1.3530 barrier. On the downside, so long as prices keep trading above 1.3025 support level, then Sterling is likely to remain strong and any drop may be short-lived.