Bearish momentum in the Pound/Dollar continues

The recent close below 1.55 was a critical blow for the Pound/Dollar bulls, and the bears have continued to exploit each opportunity to increase selling pressure with the pair still looking technically vulnerable to further declines. The indications from the Queen’s speech that a bill on an EU referendum will be rushed through parliament, at the same time as UK Prime Minister David Cameron begins his negotiations with EU leaders, has also provided the bears with additional encouragement to drag the pair lower. In general though, the UK economic data outflow has been really thin this week, meaning that the Dollar has provided direction for the Pound. With the Dollar enjoying a fresh round of bullish momentum, this has further inspired the Pound/Dollar to slide down the charts.

Why do I think the Pound/Dollar is still vulnerable to further declines? If the upcoming preliminary UK GDP reading shows that economic momentum is slowing down and this pushes back BoE interest rate expectations, then the Pound/Dollar will continue drifting lower until at least 1.52.

The Euro also continued to decline throughout trading, although this pressure came to a pause when reports emerged from Greece that a deal with its creditors is close to being finalised. There are going to be concerns over whether these encouraging reports will be contradicted later on, but the positive news would be that the risk of a Greece default next week would be avoided if a deal is struck. I just hope that if a deal is finalised that this time it is a real agreement to conclude the discussions with creditors, and not just another extension for further negotiations to continue with an extended deadline.

Will the EURUSD rally if a deal is reached? There might be an initial reaction, but I do not think it will fully relieve the recent selling pressure. There are still going to be risks ahead because if Tsipras has backed down, then there is a possibility of a backlash back home because his whole election campaign was based on the promise to end austerity in Greece. On the other hand, if it is announced that Greece has received some flexibility with its bailout conditions then anti-austerity parties across Spain are likely to find added inspiration to rally their campaign with the general election in December now beginning to catch attention.

In line with expectations, the renewed Dollar momentum softened yesterday as a result of there being very little economic news out of the United States. Janet Yellen reignited buying interest after repeating the Federal Reserve’s commitment to raising US interest rates at some point this year, just as doubts were starting to settle in as to whether the Fed might hold back until 2016. What I found interesting from her remarks is that she still refused to offer any potential timeframe for a rate increase. We currently expect September to be the time for a rate rise, but the “at some point this year” remark provides flexibility for interest rate expectations to be pushed back into December.

The real test to find out how sustainable this Dollar rally really is will be the US GDP figures at the end of the week. If economic growth continues drifting lower, then it increases the argument for the Federal Reserve to maintain its cautious and hesitant stance towards raising US interest rates. While I do understand that the Federal Reserve’s main mandate is inflation expectations and job growth, the anticipation for rate rises will be lowered if fragilities in the US economy continue to be exposed.

One instrument that I am keeping a very close eye on at present is WTI Oil, because the commodity is beginning to look increasingly bearish. We recently fell to a one-month low at $57.34 and if we slip below $56.80 then the bears will likely continue to dominate in which direction WTI trades. The reaction to the weekly US crude inventory report will be one to look out for because if the bulls do not push the price higher despite the chances being high than another reduced trade surplus will be announced, then it just shows that there is a lack of buyers in the market. The bearish momentum in WTI oil is also providing problems for commodity linked currencies, with the currencies currently under pressure stretching from the Australian and New Zealand Dollar to as far as the Russian Rouble and Mexican Peso.