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- GBP to remain on front foot this week but is vulnerable.
- Commerzbank and UBS both short-term buyers of GBP.
- But election polls set to remain in the driving seat of GBP.
- TV debates followed by manifesto releases set to drive polls.
The Pound-to-Dollar exchange rate is being tipped to remain on its front foot this week but although gains will be limited a series of 'resistance levels' on the charts, according to technical analysts studying the charts, although others are warning that Sterling would be likely to retreat if the Conservative Party poll lead shrinks at any point.
Sterling clocked up a 1% gain over the Dollar last week after Prime Minister Boris Johnson was seen improving his chances of securing a parliamentary majority in the December 12 general election and as U.S. bond yields retreated further from their November 08 high.
American 10-year bond yields had attempted to break above the 2% level earlier in November but failure to clear that hurdle has since seen the benchmark of government borrowing costs retreat back to 1.83%.
Lower yields have tempered appetite for the Dollar and given other currencies a look-in with investors, while Prime Minister Johnson's position in the election polls helped make Sterling the second best performer against the greenback for the week, behind only the New Zealand Dollar.
Technical analysts at Commerzbank say the Pound is now entering what its likely to become its second consecutive week of gains.
"GBP/USD continues to attempt to recover from the 1.2764/ 23.6% retracement. It is currently probing the 20 day ma at 1.2872. Only above here will leave the market well placed for another attempt at the psychological resistance at 1.3000. Directly above here we have the 200 week ma at 1.3122 and the 1.3187 May high and these remain our short term targets, but we look for the market to be capped here," says Karen Jones, head of technical analysis.
Above: Pound-to-Dollar rate shown at 4-hour intervals.
Jones bought the Pound-to-Dollar rate around 1.2840 last week and advocated that clients of the bank do the same. She's targeting a move up to 1.31 over the coming days and weeks but says she'll exit the trade at that point. She's not alone either because the FX trading desk at UBS said last week that they're still happy to buy the Pound-Dollar rate upon any dips back toward the 1.28 level.
"The desk is still biased towards buying GBPUSD on dips. Initial support is now expected into 1.2850/60, ahead of 1.2800/20. The resistance area into 1.2890/1.2900 has held, and a daily close above 1.2900/20 would be an incrementally bullish development and open things up for a move towards 1.2980," says Michael Nair, an FX spot trader at UBS.
Nair said Friday that the Brexit Party decision to withdraw from three marginal seats in which the governing Conservatives are locked in a reportedly tight race with the opposition Labour Party is good for the Pound. The Brexit Party has now withdrawn the bulk of its 600 earlier candidates for election, leaving Boris Johnson and his Conservative Party as the only the option for 'leave' voters in all seats that they currently hold and in some Labour-held marginal seats too.
Above: Pound-to-Dollar rate shown at daily intervals.
The U.S. Dollar: What to Watch
The Dollar softened in the latter half of last week as U.S. government bond yields continued to retreat from earlier highs in response to fresh doubts over whether the 'phase one deal' between the U.S. and China, as well as due to economic concerns, although some strategists say the downside will be limited in the days ahead.
Minutes of the October Federal Reserve (Fed) interest rate meeting are the main event in the calendar for the Dollar although after a series of more up-to-date remarks from various Fed policymakers over the last week, few anticipate the minutes having much impact on the market. That could leave investors again looking to the White House and trade talks with China for cues on the Dollar, not least of all because the economic calendar is otherwise quiet.
"The dollar did lose some momentum after a two-week run, but is still lacking a tangible negative catalyst, so it may be able to retain most of its recent strength in the coming days," says Chris Turner, head of FX strategy at ING. "The contradicting news flow on trade negotiations continues to generate market noise but it can neither trigger a major correction in the supported risk environment nor fuel a decisive rally in pro-cyclical assets."
Turner says the Fed minutes should confirm that, after three rate cuts thus far in 2019, policymakers intend to sit back and observe the results of their work into year-end rather than taking any further actions. Fed Chairman Jerome Powell suggested said last week that inflation remains "muted", the growth outlook is favourable and that it would take a "material reaassessment" of the outlook to get the bank cutting rates again any time soon.
"The USD’s recent rebound has lost some upward momentum over the past week after 10-year UST yields failed to break back above 2.00%. The pullback in US yields has encouraged low yielding currencies such as the JPY and CHF to strengthen. Market participants remain optimistic over a partial US-China trade deal but there have been only modest spill-overs into the FX market," says Derek Halpenny, head of research, global markets EMEA & international securities at MUFG.
President Trump told The Economic Club of New York late Tuesday that "a significant phase one trade deal with China could happen" but then threatened that "If we don’t make a deal, we’re going to substantially raise those tariffs. They’re going to be raised very substantially." The remarks underlined a recent change in White House rhetoric around the agreement that was said to have been struck with China on October 11, which now seems less like the sure thing it was billed as just a few weeks ago.
Those remarks and their uncertain implications for the trade war and U.S. economy are what prompted the turn lower in government bond yields.
Pound Sterling: What to Watch
Ebbing and flowing polling numbers are to remain the single greatest influence on the Pound over the coming days with economic data lonce again taking a back seat. This means the first televised leadership debate due on Tuesday will be an important moment for the Pound.
Prime Minister Johnson will go head-to-head with opposition Labour Party leader Jeremy Corbyn in a televised debate Tuesday and with neither party's manifesto expected before the weekend, it's likely that talk of rival visions for a post-Brexit UK will dominate the discussion. Investors and analysts will be looking to see Johnson emerge from the debate without his polling lead, which some firms estimate to be as high as 12%, intact.
A Conservative Party majority would enable the Prime Minister to take the UK out of the EU with an agreement that averts a 'no deal' Brexit and provides businesses with some kind of certainty about the country's trade arrangements over the coming years. That would also keep the opposition Labour Party and its controversial policy agenda from the doors of 10 Downing Street and possibly even slow the decline in business investment that's been ongoing since the referendum.
"EUR/GBP has been gradually grinding lower over the past week. The pound’s outperformance primarily reflects building optimism that the Tories will win a majority at the upcoming election," says Derek Halpenny, head of research, global markets EMEA & international securities at MUFG. "The gap though between the Tories and Labour would have to narrow materially to create more election uncertainty and weaken the pound. Market optimism over a potential end to the Brexit deadlock in parliament has allowed the pound to weather the softening UK economic data flow over the past week."
Retail sales fell by 0.1% in October, Office for National Statistics data revealed, when markets were looking for them the rise. Falling sales volumes on the high street in October could mean the economy saw a slow start to the final quarter. Meanwhile, other figures showed UK inflation pressures in retreat last month, providing the Bank of England (BoE) with time to sit on its hands and observe developments in the Brexit process.
CBI Industrial Order Expectations figures are out on Tuesday at 11:00 and the latest public sector net borrowing numbers will be out on Thursday at 0930, although investors will likely be more focused on Westminster.
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