GBPUSD: 1.50 test in the pipeline?

GBPUSD has avoided a fall below the massive 1.5250 area support so far this year, but its days above that level – and perhaps even 1.50 – may be numbered.

The USD rally against the Euro has only been weakly reflected against the pound in recent week as, within Europe, sterling is seen as a relative safe haven as the EU debt crisis rolls on. The USD is perking up, however, as relatively weak data in the US and other global indicators suggest that markets are concerned about the prospects for growth and for risk assets. Importantly, with significant further easing priced into the forward curve, it is interesting that the markets are failing to respond to the usual signals, which suggests we may be in for a bout of volatility, which tends to favour the most liquid currencies like the USD the most.

Chart: GBPUSD
Twice this year, GBPUSD has probed below the 1.5300 area, only to survive the experience and maintain itself within the range. But a number of factors are conspiring against cable remaining at these levels, including more aggressive QE from the Bank of England, a far weaker economy in the UK relative to the US and the UK’s exposure to the weak economy on the continent, and even interest rate spreads, which as an isolated factor suggest that GBPUSD should have broken to new lows back in June. Assuming the EU situation remains somewhat static and risky assets continue to trade sideways to down, GBPUSD may fall through the 1.5250 area and even test below 1.50 in the weeks ahead. If a break doesn't happen soon, we may be headed for a ranging summer doldrums, but that would require some heavy lifting from rallying asset markets.