1.3040 is Pound to Dollar Exchange Rate's Near-Term Support Floor
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Declines in the pound / dollar exchange rate have faded, has the GBP absorbed the majority of its Brexit hit?
The GBP/USD conversion is seen trading at 1.33, having bounced off what has proven to be a remarkably solid point of support - the 1.30 level.
Even as the pair sold off aggressively, analysts warned that the important level of support to watch for GBP/USD is 1.30-1.3040 level - this represents the July and September 1985 low.
There is clearly something important about this level - the market suddenly appears incredibly oversold overtime it is met.
No wonder then that a host of big-name analysts are drawing their post-Brexit line in the sand for GBP/USD at 1.30.
“With the UK voting in favour of leaving the European Union, the GBP’s outlook appears to be subject to heightened uncertainty. We stressed previously that in the unexpected case of a Brexit, majors such as GBP/USD should approach levels closer to 1.30 and EUR/GBP around 0.85,” says a strategy note released by Credit Agricole.
Of the below ten analysts surveyed by Bloomberg, six place their post-Brexit GBP/USD forecast target at 1.30.
Above: GBP/USD scenario matrix, courtesy of Bloomberg and Investec.
There are however some that place it as low as 1.10 - so be warned, there could well be notable declines in store yet.
“Looking ahead, it cannot be excluded that the BoE will have to act anew in order to prevent conditions from destabilising further,” say Credit Agricole. “All of the above suggests that the GBP will remain subject to downside risks.”
RBC Capital Markets have a particularly bearish outlook according to the forecast matrix.
Why?
"It will be months or even quarters before we have sufficient data to make an assessment of how hard UK activity has been hit by rising uncertainty and for now, we stick with our pre-referendum call that markets are likely to assume a 'typical' UK recession, with the shock to confidence causing output to fall somewhere between 2% and 4%," says Adam Cole, head of G-10 FX strategy at RBC Capital Markets.
Hill says it is highly unlikely that this drop in economic performance, or the policy response to it from the Bank of England, has been fully priced into GBP yet.
"The risks for GBP are still to the downside and $1.20-$1.25 is now our objective for GBP/USD in late-Q3," says Cole.
Kathy Lien at BK Asset Management says while she acknowledges how important support at 1.3040 will be over the near-term, she anticipates another 4 to 5% decline over the coming days/weeks.
“In the near term, investors, business and consumers hate uncertainty. It is safe to say that all three will avoid major investments over the next few months in fear that the forecasters are right about Brexit triggering recession,” says Lien.
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