GBP/USD: Momentum Indicators Confirm Downside to Persist
The USD has reacted positively to recent US economic data ensuring it holds the upper hand against sterling.
The pound to dollar exchange rate is seen trading at 1.5043 ensuring November lows remain in play.
"I continue to see the likelihood that rallies will be seen as a chance to sell. Yesterday’s trading has not given us much more of a steer near term with an inside day on the range, however the sellers seem to still be in control as the overnight Asian session has seen a further slide and the initial support at $1.5050 looks to be under pressure today," says Richard Perry, Market Analyst with Hantec Markets.
Momentum indicators continue to point towards rallies being sold into, whilst the RSI shows that there is further downside potential still in this latest leg lower.
US Dollar Momentum Hard to Stop
While the Bank of England’s refusal to raise interest rates until 2017 is certainly to blame for much of the underperformance we cannot ignore the USD side of the equation where good data will ensure the Fed raises rates in December.
From 447,000 units is September, new home sales bounced back in October to 495,000 units, an increase of 10.7%.
In October, the inventory of unsold new homes ticked up by 1.3% to 226,000 units from September’s 223,000.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3346▲ + 0.14%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2892 - 1.2945 |
**Independent Specialist | 1.3159 - 1.3212 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
“The pipeline for housing activity remains healthy, with building permits trending at pre-recession levels, homebuilders’ measure of buyer traffic at its highest level in a decade, and mortgage delinquencies and foreclosures at multi-year lows,” say RBC Economics Research.
“With ongoing employment and income gains expected to underpin housing demand, we expect that the housing market will continue to evolve constructively during the forecast horizon despite upward pressure on housing affordability due to rising prices and higher borrowing rates,” say RBC.
US new orders for durable goods surpassed market expectations by increasing 1.7% from declines in both August and September.
In October, the new orders for durable goods rose 3.0%.
The headline increase was driven in part by an 81% jump in non-defence aircraft orders, which followed a 32% decline the month before.
Orders of non-defence capital goods excluding aircraft rose by 1.3% in October.
In October, nominal Personal Consumer Expenditure (PCE) increased 0.1%, the expectation was a lift by 0.3%.
Personal income rose by a stronger 0.4% in October, following an upwardly revised gain in September of 0.2% and matching the 0.4% average monthly gain during the previous three months.
Disposable personal income increased 0.4 percent.
Solid income gains can be viewed as a direct reflection of the strong employment growth in the US.
The savings rate rose to 5.6% in October. The savings rate has been on a steady rise since May’s low of 4.8%.
This may bode well for the upcoming US holiday season; consumers may be saving up to shop more around that time.
“This provides strong evidence that US households are responding to both very accommodative monetary conditions and low energy costs," say RBC Economics, "the persistence of solid growth at this pace, however, raises the issue as to whether the full extent of current monetary policy stimulus is still required."
RBC are in line with consensus in their expectations that the fed will start to move the fed funds range gradually higher with an initial 25 basis point hike to the range expected at the December 16, FOMC meeting.
But - US Dollar Vulnerable to Post-Rate Hike Blues
Economists are now moving on to the next stage of the debate concerning the number and rate of increases in 2016.
Earlier in the month, the FOMC Chair Janet Yellen was quoted as saying the committee does not expect a "very steep" path of rate hikes, most likely to protect the housing sector.
Nevertheless the debate could be where the US dollar becomes vulnerable to profit-taking - if currency markets get the sense that the Fed will be soft on future rate hikes the dollar will be sold.
"The timing debate is hawkish whilst the levels debate is dovish," says David Bloom at HSBC.
"The market has, after all, had the best part of three years to prepare for a rate rise. We believe the market would immediately ask the "peak rate" question, which puts us back in a dovish world. This should signal a new era – one that is not singularly USD bullish," says Bloom.
Therefore we could well see a turnaround in fortunes for the pound to dollar exchange rate at the turn of the year.
