-GBP/USD outlook bolstered by Biden's win but risks loom in short-term.
-Split Congress & contested result may see profit-taking hit stocks, GBP.
-While technical resistance, lack of Brexit progress limit upside for GBP.
Above: Kamala Harris, Joe Biden. Photo by Adam Schultz / Biden for President
- GBP/USD spot rate at time of writing: 1.3138
- Bank transfer rate (indicative guide): 1.2795-1.2887
- FX specialist providers (indicative guide): 1.2958-1.3037
- More information on FX specialist rates here
The Pound-to-Dollar exchange rate outlook has been bolstered by an election victory for opposition candidate Joe Biden of the Democratic Party, although elevated stock markets, a looming deadline for a Brexit trade deal and technical resistance on the charts could all stymie the Pound in the days ahead.
Sterling rose 1.8% against the greenback last week to trade at its highest level since early September as investors priced-in a Democratic Party an election victory that was all but confirmed at the weekend, with Joe Biden reported to have clinched as many as 290 electoral college votes by Sunday.
That's more than the 270 needed to win the presidency, although uncertainty remained over who would control the Senate, which is set to be determined by January 05 run-off votes in the state of Georgia. This means continued uncertainty about the balance of power in Congress.
"Fiscal expectations are certainly lower but the market narrative as a result is that medium term "the Fed is the only game in town" and that should see lower US growth expectations, US yields contained and the USD on the backfoot as a result," says Jordan Rochester, a strategist at Nomura. "That is why we see no reason to cut our USD shorts here and remain long EUR/USD and GBP/USD."
Prime Minister Boris Johnson congratulated Biden this weekend after postal votes flipped a series of key swing states, setting the White House up for a change of hands on January 20's inauguration day, although President Donald Trump has alleged that this was not without illegal votes and is threatening legal action. It's not clear whether he'll succeed in casting legal doubt over the result but for the time being at least, analysts see the Dollar facing further declines..
Above: Pound-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (yellow line, left axis).
Democrat spending plans, the prospect of an economically stifling regulatory agenda and resulting likelihood that further Federal Reserve stimulus becomes necessary have all been cited among the reasons for why the Dollar is expected to continue declining over the coming months. However, with the Dollar Index having fallen nearly 2% last week while the S&P 500 rose more than 7%, the outlook for the coming days may be more nuanced.
"We are not confident that the heavy selling pressure that is weighing on the USD currently will be sustained. The global stock rally that characterised yesterday’s trading session has already stalled," says Jane Foley, a senior FX strategist at Rabobank.
The possibility of continued Republican control over the Senate risks limiting the extent to which the Democratic Party can implement its policy agenda, potentially gridlocking Washington in the coming years, while President Trump's threat to contest the election outcome adds an extra layer of uncertainty over the short-term outlook. If either of these factors was to encourage profit-taking by stock market investors this week then the positively-correlated Pound-to-Dollar rate could come under pressure.
"While the Senate probably won't be resolved until Jan. 5, 2021, it still looks about 85% likely to go Red. That’s gridlock. This USD sell-off doesn't make a ton of sense to me in the context of the new information in the past few days and what I'm hearing as a narrative is mostly ex-post justification," says Brent Donnelly, an FX trader at HSBC. "It might be worth honestly assessing if dollar weakness is sustainable as the next 8 weeks will be clouded by a purple haze of red/blue fiscal policy uncertainty."
With the stock market implications to one side, there are potentially other reasons why Sterling might be a major currency laggard this week and may even correct lower, including the reduced prospect of a UK-U.S. trade deal with an administration led by Joe Biden as well as an ongoing absence of progress in the Brexit trade talks.
Above: GBP/USD with Fibonacci retracements (resistance) of September fall, 200-day average (black line), 55-day average (orange) and 21-day average (blue).
"We still don’t expect that the two sides will reach an agreement, and thus anticipate that the GBP will under-perform its key peers for the remainder of the year," says Shaun Osborne, chief FX strategist at Scotiabank. "The GBP’s rebound from the mid 1.28s on Monday has stalled around 1.3155/60 as the currency aims for a test of 1.32 but with the 61.8% Fib retracement of its Sep drop at 1.3174 likely set to act as a key resistance marker."
The Telegraph cited a campaign spokesperson when reporting at the weekend that a UK deal would not be a priority for the new administration. Biden is expected to be friendlier toward the EU than President Trump and less interested in deepening trade relations with the UK, likely enhancing the economic imperative for a Brexit deal with Brussels. Brexit trade talks continue this week but time is thought to be running short with a mid-November deadline for a deal to be done now drawing near.
"Negotiations are getting into the final phase, with the outcome possibly emerging over the next two weeks. We continue to expect an eventual agreement. The ongoing sharp decline in preferences of the Conservative Party in polls (now lagging behind the Labour Party) should be one more reason for the UK government to move towards a deal, given the likely hit to the UK economy from the no deal scenario. Hence, the GBP/USD risk remains titled to the upside," says Petr Krpata, chief EMEA strategist for FX and bonds at ING.
Many analysts view a Biden administration and the reduced scope for a deal with the U.S. as making Brexit compromises from Downing Street more likely. It's partly as a result of this that they're anticipating further gains this week, although if the Pound does advance from Friday's 1.3148 then it won't be long before it runs into technical resistance on the charts. GDP and jobs data due from the UK this week is expected to have little bearing on the Pound.
"We have fairly decent resistance offered around 1.3201, the March high and key resistance offered by the 1.3422 multi-year downtrend and if seen we would expect this to again hold and provoke failure. We suspect that rallies are likely to remain fairly limited," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Support is offered by the 1.2863/55, the lows since mid-October and the 1.2814 the June high."
Above: GBP/USD with Fibonacci retracements (supports), 200-day average (black line) and 55-day average (orange).
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