Risk extra retracements in the near term – UOB

UOB Group’s Economist Lee Sue Ann and Markets Strategist Quek Ser Leang suggest there is still room for further weakness in GBP/USD in the next few weeks.

Key Quotes

24-hour view: Our view of range trading in GBP yesterday was incorrect. Instead of trading in a range, GBP fell sharply and dropped a couple of pips below the major support at 1.2400 (low of 1.2398). Today, GBP is likely to continue to weaken, even though severely oversold conditions suggest a sustained break below 1.2355 is unlikely. The next major support at 1.2305 is highly unlikely to come into view today. On the upside, a break of 1.2455 (minor resistance is at 1.2430) would indicate that the weakness in GBP has stabilised.

Next 1-3 weeks: Last Monday (04 Sep), when GBP was trading at a much higher level of 1.2590, we highlighted that “the risk for GBP appears to have shifted to the downside.” We maintain our negative GBP view, and yesterday (14 Sep, spot at 1.2490), we pointed out that “as long as 1.2555 is not breached, there is a chance for GBP to drop to 1.2400 before stabilisation can be expected.” While our view turned out to be correct, as GBP dropped to a low of 1.2398 in NY trade, we did not quite expect the rapid pace of decline as GBP closed sharply lower by 0.64% (NY close of 1.2411). There is no sign of stabilisation just yet. In other words, we continue to expect GBP to weaken. The next level to watch is May’s low near 1.2305. On the upside, the ‘strong resistance’ level has moved lower to 1.2485 from 1.2555.