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Pound has Finally Collapsed Lower

The Pound-to-Dollar exchange rate (GBP/USD) was on the verge of breaking through two-year lows at the 1.35 level in midweek trade before tentative buying interest returned. The sizable pick up in US yields with the 10Y once again reclaiming 1.5% has also underpinned the greenback. That being said, the view is that the Pound is moving into a rather precarious situation for several reasons. Firstly, OIS markets have priced in BoE tightening rather aggressively, a 15bps rate hike has been fully priced in by February with a second hike seen by August 2022. There is an argument that the rates market is priced for perfection at a time where UK data is expected to get gradually weaker. Therefore, the room to disappoint hawkish BoE expectations has increased.

Technically the decline of the GBPUSD found support in the 1.3415 level and retraced back up to the weekly S3 simple pivot point at 1.3463 then pair fluctuated sideways in the 1.3415/1.3463 zone. In theory, the rate should continue to decline, as it has no technical or historical price support levels close by. However, take into account that round exchange rate levels like the 1.3400, 1.3350 and 1.3300 could provide support and stop a decline. On the other hand, the GBPUSD can be considered oversold, as it has left far above it the hourly simple moving averages. The closest SMA was the 55-hour SMA at the 1.3530 level. Note that a potential recovery to the SMA would face the resistance of the weekly S3 simple pivot point at 1.3463.

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