The British Pound Crosses a Major Threshold Against the US Dollar

The pound sterling's recovery against the Greenback achieved a major milestone over the past 24 hours. The outlook is certainly brighter.

Pound to dollar exchange rate at 1.4427 in wake of Janet Yellen's speech in New York

GBP/USD crosses both the 20 and 50 day moving averages - a positive sign

Pound sterling moved notably higher on Tuesday the 29th of March thanks to a broad-based dollar sell-off sparked by the US Fed Chair Janet Yellen who told an audience in New York that caution in raising interest rates was "especially warranted."
This has lead markets to speculate that the Fed may not raise interest rates two times in 2016 as previously assumed.
The promise of higher interest rates has been the bedrock of US dollar strength over recent years, and anytime the US Fed rows back from raising rates you can bet the dollar will fall.
In short, the US Fed is uncertain on how its policy will evolve, and currencies hate uncertainty. What makes Yellen's comments all the more cruel is that they fly in the face of the hints given by other Fed decision-makers.
Over recent days a number of Fed speakers had hinted at being more agressive in raising rates; the dollar rose alongside.

Latest Pound / US Dollar Exchange Rates

Live:

1.443▲ + 0.35%
12 Month Best:

1.5929

Your Bank's Retail Rate

1.394 - 1.3997

Independent Specialist

** RationalFX

1.4228 - 1.4286

Note: Independent specialists are able to get you closer to the market rate thanks to lower spread charges. This can deliver upto 5% more FX in some instances. Get Your Quote

* Spread observed on FXCompared 30/03/2016 ** Quote from Rational's dealing desk

All rates are indicative and intended to serve an illustrative purpose.

A Big Technical Hurdle is Crossed
The Yellen comments and subsequent dollar action delivered a notable move in the pound to dollar exchange rate.
GBP/USD has broken above a converged 20 and 50 day moving average and delivered a classical technical signal that advocates for further gains.

There are two points to note from a technical perspective:
1) The ability to move above the 20 (green line) and 50 day moving average (grey line), and close higher, was always going to be a hard ask as history has proven time and again that there is always huge interest in selling GBP/USD at such a point. This resistance appears to have been overcome.
2) The short-term moving average (the 20 day) has crossed the medium-term moving average (the 50 day).
“This signal is used by traders to identify that momentum is shifting in one direction and that a strong move is likely approaching,” says Casey Murphy, Senior Analyst at ChartAdvisor.com.
So has momentum shifted decisively in favour of sterling?
The move has occured three times over the past year with the exchange rate putting in a notable rally when the 20 day crossed the 50 day moving average back in April 2015.
The currency pair rose from 1.54 to 1.58 on this occassion.
However, on subsequent occassions in August and October, the move proved to be false confirming that while the gains can be massive, in some instances they may also be fleeting and this would be our number one concern with regards to the current cross.
Remember that the dominant trend is down courtesy of the poor 2016 witnessed so far, although the key March 15 trough lows at 1.4052 have not yet been broken again suggesting a potential floor has been formed.
The exchange rate has come within a hair’s breadth of the lows at 1.4056 last week but the bounce higher confirms that there is solid buying interest in the pound at these levels.

Beware the Fundamental Dangers
The one big risk to the British pound's outlook remains the EU referendum as the uncertainty of leaving the EU raises a number of questions.
Markets do not like uncertainty, and an 'Out' vote presents this.
Every time the 'Out' vote gains, expect sterling to struggle.
Brexit fears were revived after recent polls showed a rise in the 'Out' vote following the Brussels bombings; the UK public tends to become more sceptical on Europe in the wake of such events, the terror attacks in Paris being another case in point.
The odds of the UK leaving Europe have also risen at the bookmakers who have traditionally had an 'In' vote as being the favoured outcome by some margin.
Watch this story as what tends to happen is the market suddenly decides that they are embarking on a Brexit-inspired sell-off.
The timing is impossible to call.
As such, strict risk-management is required when handling any sterling market and the management of stop-losses at key support zones is key.
While the outlook has certainly turned more positive on GBP from a technical perspective there is a chance an avalanche of selling could hit at any time.