- GBP/USD looking cheap says Crédit Agricole
- USD lower heading towards year-end: Citi
- But CIBC say they back USD strength
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The British Pound could extend a recent rally against the U.S. Dollar if the stances held by a number of institutional strategists we follow prove correct, although others still prefer to back the Dollar.
Strategists at Crédit Agricole find that the Pound is now screaming as undervalued relative to the U.S. Dollar in the short-term and one of their proprietary models advocates buying GBP/USD as a result.
"At present, the G10 FX PIX 2.0 signals that the GBP is oversold," says Valentin Marinov, Head of Strategy at Crédit Agricole.
Subsequently, the strategy desk entered a 'long' position (i.e. a buy) in GBP/USD with a target (+3%).
"As a result of the latest dip in the GBP positioning index below its two-month average, the currency is now trading in oversold territory," says Marinov.
Above: Crédit Agricole's measure of GBP value
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"We remain bearish on the USD over time as we remain optimistic on the global economic recovery in an environment where central banks continue to provide much accommodation," says Ebrahim Rahbari, Chief G10 Currency Strategist at Citibank.
The Pound-to-Dollar exchange rate (GBP/USD) had started 2021 with a strong trend of appreciation but a failure at 1.4250 in early June has given away to weakness, driven primarily by a broader impulse of U.S. Dollar demand.
How that demand plays out over coming weeks will likely determine whether GBP/USD has another shot at the 2021 high before the year is out.
Citi's Rahbari says conviction for a weaker U.S. Dollar into year-end is also premised on a view that the yield paid on U.S. government bonds - a key determinant of Dollar value that ultimately rests with expectations for U.S. Federal Reserve interest rates - is unsupportive.
"Moreover, US real yields continue to have difficulty moving higher," says Rahbari.
Conviction on the Dollar's outlook is however not easy to divine in the current market, which is understandable given the shaky macro backdrop linked to peaking global economic growth amidst an ongoing wave of Delta cases.
Bipan Rai, North American Head of FX Strategy at CIBC Capital Markets tells clients his team prefer to back the Dollar for the foreseeable future.
"We’re still USD bulls here, and we’re still on the lookout for entry points into trades we like," says Rai.
Some of the reasons why CIBC still think the Dollar is headed higher include:
- Real yields in the US are too low (contrast this to Citi's view above).
- Market expectations for the upcoming rate hike cycle in the US are too dovish
- When it comes to tightening, the Fed has waaaay more headroom than the ECB/BoJ/SNB, etc.
- The sheer size of the fiscal impulse in the US versus other large DMs
- US assets are still too attractive for foreign investors relative to other options.
The Pound-to-Dollar exchange rate is churning around in a tight range around the 1.38 level at present, showing no near-term preference for either upside or downside.
The indecision comes as the domestic narrative remains supportive of Sterling although falling stock markets are acting as a headwind.
Official UK employment data this week beat expectations as did Wednesday's inflation numbers, meanwhile short-term survey data suggests September has seen a pick up in underlying activity.
Despite dire warnings from various scientists that the UK is facing another crippling Covid-19 wave, official data suggests a week-on-week fall in cases is becoming more entrenched which makes for comfortable reading ahead of the Autumn.
Add to this supportive guidance from the Bank of England which affirms market expectations for a H1 UK rate hike and recent gains in the Pound look justified.
Broader investor sentiment still matters greatly for the Pound-Dollar exchange rate which tends to appreciate against when investors are optimistic and markets are moving higher.
Therefore the ongoing move lower in global stocks is a prime suspect in the Pound's inability to break to new highs against the 'safer haven' Euro and 'safe haven' Yen, Dollar and Franc.
"Risk assets will continue to struggle in the near term with weak hard data due to the Delta outbreak and supply disruptions over the summer, in our view," says a weekly foreign exchange briefing from Barclays.