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Pound-Dollar Rate Vulnerable as Market Eyes U.S.-China Deal Signing

- GBP bottom of the barrel again on fresh domestic woes.

- But GBP/USD vulnerable to more losses, charts suggest.

- Although USD response to China deal signing a wild card.

- U.S.-China to sign 'phase one deal' at 16:30 in Washington.

- Signing of pact could be taken either way by the FX market.

Image © White House

- GBP/USD Spot rate: 1.3012, down 0.07% for today

- Indicative bank rates for transfers: 1.2540-1.2630

- Transfer specialist indicative rates: 1.2800-1.2870

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The Pound was under the cosh again Wednesday as the probability of an imminent Bank of England (BoE) rate cut rose further and technical analysts are warning of downside risks to the British currency, but the afternoon's eagerly-anticipated signing of the U.S.-China trade deal is a wild card for Sterling. 

President Donald Trump and Chinese Vice Premier Liu He are set to sign at 16:30 in Washington, the long-awaited 'phase one deal' that was said to have been agreed on October 11. Wrangling over the exact terms, not to mention the translation, is done and an official signing ceremony is now looming.

Inking the deal will at the least prevent any new tariffs from being imposed by either side over the coming months so long as both parties can remain in compliance with it, which should be a boon for both the U.S. and global economies that have suffered as international trade costs rose and business confidence fell throughout the tariff fight. 

"Positive sentiment currently prevails with the signing of the phase one trade deal, talk of a phase two agreement and rekindling of the semi-annual strategic dialogue," says Jan Lambregts, head of research at Rabobank. "We would urge anyone to take a longer view and be far more skeptical."

Above: Pound-to-Dollar rate shown at hourly intervals.

Wednesday's ceremony should temporarily end the tariff fight that saw the world's two largest economies impose increasingly large levies on imports from the other side between the early months of 2018 and the end of last year, but some have doubts about how long it will last for. Doubts that may have been partially vindicated by the revelation that existing U.S. tariffs will not be removed from Chinese exports until a 'phase two' deal is struck. 

Markets had believed that some existing levies would be repealed but investors are yet to see the text of the agreement and so have been pricing financial assets based on the contents of drip-fed leaks to the press. The U.S. says the text will be released Wednesday and the only thing that won't be made public is the annexe detailing the exact products China will buy as part of a commitment to step up purchases of agricultural goods.

The Wall Street Journal reported Wednesday that those purchases are in exchange for the U.S. suspending new tariffs. And Treasury Secretary Steven Mnuchin told CNBC News that tariff 'rollbacks' will not be considered until after the November Presidential election. 

Above: U.S. Dollar performance Vs major rivals in 2020. Source: Pound Sterling Live.

"While some purported details of the deal have emerged, we may not know the full extent of what has been agreed, in part because China has expressed an interest in keeping the deal unwritten," says John Hardy, chief FX strategist at Saxo Bank. "The USD remains firm but lacks a pulse tactically as we await whether the US-China trade deal sparks any interest. The EURUSD suffered a bearish reversal, but has yet to follow through lower."

The trade war and resulting damage to the U.S. as well as global economies was the number one driver of the three Federal Reserve (Fed) interest rate cuts that were seen in 2019 so an end to the tariff conflict will have implications for all economies and currencies including those of the U.S. However, the exact likely response of the Dollar and its counterparts is uncertain. 

"We have a feeling tomorrow’s signing will be a “pomp and circumstance” type of event that will lack substance, but could potentially set traders up for a classic “buy the rumor…sell the fact” type of market reaction," writes Eric Bregar, head of FX strategy at Exchange Bank of Canada, in a note to clients Tuesday.

Above: Dollar Index shown at daily intervals.

To the extent that Wednesday's deal is seen leading to a pickup in economic growth outside of the U.S., it could be bad for the Dollar. But lingering doubts about how long it can remain in force for, not to mention the fact that existing tariffs will remain in place, could mean the only benefit to come for the global economy is that things simply don't get any worse than they already are. 

A lot depends on the collective view adopted by the market but if the resulting consensus turns out to be that the much-vaunted and long-elusive trade pact will do little for the global economy then it could simply serve to further entrench the Dollar's interest rate advantage over other rivals. And with markets now moving rapidly to price-in a January interest rate cut from the Bank of England, such a thing would be bad news for Pound Sterling. 

"GBP/USD is under pressure while capped by the near term downtrend at 1.3100 and the December low at 1.2908 is exposed. Failure here would put the 4 month uptrend at 1.2820 and the 200 day moving average at 1.2689 back on the plate," warns Karen Jones, head of technical analysis at Commerzbank.

Above: Pound-to-Dollar rate at daily intervals, reconnecting with GB-U.S. bond yield differential since late 2019.

Canada's Dollar is the only major currency with an interest rate to rival that of the Fed, which explains in substantial part why the smaller Dollar was the best performer in 2019. Meanwhile, Sterling's under-threat 0.75% Bank Rate has left it indistinguishable from the troubled Aussie Dollar and barely better off than the European currencies who's rates shadow those of the European Central Bank, which has a negative deposite rate and a main interest rate of zero.

Consistent messaging from Fed Chairman Jerome Powell and other policymakers has recently seen expectations for U.S. rate cuts pared back so that markets only now expect one reduction to the Fed Funds rate in 2020. Powell said in December that so long as U.S. growth is “sustained”, the jobs market remains “strong” and inflation is “near the symmetric 2 percent objective" the current 1.75% level of interest rates would "remain appropriate”.

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