Loss of GBP1.4200-level could send pound sharply lower, CMC says

The pound appeared to test a critical level of technical support on Monday, with further losses and volatility to be expected should the said level be lost, according to analysts at CMC Markets UK.

In a note to clients, Michael Hewson, chief market analyst at CMC, said traders should keep a close eye on the GBP1.4200 level in the sterling's exchange rate versus the dollar.

Looking at the monthly price charts, that level marked the lower bound of the trading range for cable – as the pound-US dollar exchange rate is known to traders – harking all the way back to 25 years ago, Hewson pointed out.

The last time the pound finished below that level was in 1985 (the year of the Plaza Accord), when it was recovering from the record-low of 1.0520 hit against the greenback in March of that year.

On 22 September 1985, world leaders would announce an agreement to weaken the US dollar following its appreciation against the British pound, French franc, German mark and Japanese yen over the previous five years following sharp interest rate hikes Stateside.

Even in the middle of the currency crisis, at the start of 2009, when it hit a low 1.3500, the pound was able to recover and finish the month well above the 1.4200 mark, Hewson pointed out.

To be exact, the 1.4220 level marked the lows hit by cable in May 2010 in the aftermath of the UK General election hung parliament.

“The rise in the US dollar appears to be driven by the expectation that the Fed could well increase rates a great deal further over the course of the next year. Given some of the economic data coming out of the US this belief seems rather misguided at best,” Hewson said.

Nevertheless, “these levels do mark an important area of support for sterling, which at current levels could prompt significant further losses as well as volatility in the short term if they were to give way to the downside,” he added.