GBP remains under serious pressure taking cable back towards 1.20 this morning, albeit quickly rebounding. In historical terms, cable remains very 'cheap' in the market at these levels are raises the question as to how long this could sustain.
The weakness in cable has been a story of 2 halves, relentless USD strength has forced all major crosses lower with GBP showing the poorest performance in September of all G10 currencies. The market had appeared optimistic where the BOE could take interest rates however poor economic data surrounding services PMI may have been the catalyst to pause rates in Septembers meeting.
Looking forward, we expect some relief in the overextended USD bull run, giving way to some upside for cable. Given this is NFP week, the data outcome will largely dictate whether the bull run (pullback) can be sustained. As for the pound, it becomes difficult to see value in a medium term bearish move given the historical prices.
Remembering that the UK is a net importer, the future trade balance deficit will continue to worsen with such a weak currency in global markets, the last thing the UK needed after the complications of trade, post Brexit. Furthermore, this will do all but help the inflation rhetoric as goods and raw materials are largely imported, forcing businesses to pass these costs on.
Technically GBPUSD
Weekly candlestick chart GBPUSD
The previous 12 months still remains strongly bullish for cable, albeit we have dropped 1000pips from the July highs back towards 1.20. The market is now showing signs of slowing down with a strong rally this morning after filling the weekly imbalance zone at 1.2170 - 1.2110.
The intraday trend is still firmly bullish however we believe this area to be a level of significance where the market has the potential to begin turning higher. The long term outlook for cable (into 2024) would be for this weekly trend to continue and move back towards 1.42.
Strategy:
Proceed with caution on short positions as the market could be poised for a turnaround around current levels.
Short positions should have a short term intraday time horizon.
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