British Pound Bounces Into the 'Sell Zone' Against the US Dollar

Strategists are betting on a decline in the pound to dollar exchange rate (GBP/USD) having witnessed a potential weakening in the March recovery move.

• GBP/USD at 1.4366 at time of article update
• Soc Gen say GBP now in the 'sell zone'
• Citibank targetting sustained move lower to 1.35

The pound sterling has recovered from 1.39 at the start of the month to register a high of 1.4514 last week taking us to the best levels for dollar buyers since mid February.

The move higher has however also invited new selling interest in the GBP/USD with strategists advocating for resumption of weakness.

"GBP/USD has bounced into the sell-zone just above 1.44. Go short GBP/USD with a stop at 1.47 and targetting 1.39. We expect sterling to come under further pressure on Brexit jitters as we head closer to the EU referendum on June 23," says Alvin Tan at Societe Generale in London.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3329▲ + 0.02% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2876 - 1.2929
**Independent Specialist	1.3143 - 1.3196 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Dollar Oversold

The dollar last week had its subpar start to the year reinforced by new guidance from the Federal Reserve that trimmed its outlook for the economy and interest rates.

The Fed’s cautious take on the U.S. and global economies has it now envisioning two rate hikes before the end of the year, down from four it had forecast last December.

The strength of the USD sell-off leaves the exchange rate looking overbought - this is inviting real money to buy dollars at discounted rates while speculators will be increasingly willing to bet on a corrective move lower.

"The decline in the greenback has driven many major currencies into overbought territory and a correction at these extreme levels also seems likely. This suggests that currencies could move into a more consolidative mode with rallies in the dollar being sold as we only have second tier U.S. data on the calendar," says Kathy Lien at BK Asset Management.

Remember the dominant theme in GBP-USD over longer-term timeframes is one of weakness and the assumption that moves lower will ultimately resume will be a strong one.

CitiFX Technicals say they are maintaining a stance of selling the pound on rallies noting the exchange rate remains subject to a bearish technical outlook with longer term support at 1.3508-1.3682 being viewed as ultimate targets.

These targets are the lows from 2001 & 2009.

However, analysts at the world’s largest FX dealer caution the move lower could likely be delayed by the FOMC’s more dovish outlook and near over-extended GBP short positioning.

US Dollar Outlook Softer as it Enters ‘Hibernation’

There are further suggestions that the lion’s share of the US dollar’s strength has now passed.

No doubt, these suggestions will only become more commonplace on the back of news that the US Federal Reserve is only likely to raise interest rates twice in 2016, down from the four envisioned at the end of 2015.

Without this interest rate support the dollar will likely struggle as the vast flows into the US seeking higher investment yields are put on hold as a result.
http://www.bloomberg.com/news/articles/2016-03-16/fed-scales-back-rate-rise-forecasts-as-global-outlook-weakens

Indeed, it has been a disappointing start to the year for dollar bulls. It is not long since the overwhelming market consensus was envisaging a turbocharged USD for 2016 across the board, with some predicting EURUSD falling to parity and below.

“But fundamentals matter. Misalignments from equilibrium can be persistent, but in the end they do correct,” says Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London.

UniCredit have been arguing for some time, since mid-2015 in fact, that the US dollar rally was overdone and that the exchange rate had approached extreme overvaluation levels.

Developments in recent months suggest that the market is becoming increasingly aligned with this view.

The USD vs. majors is now down more than 5% since mid-January and the broad index (which includes EMFX) is down in excess of 4%.

Reasons Why the Dollar Will Under-Perform Going Forward

UniCredit cite four reasons why the dollar’s time in the sun could now be over:

1) What began as a re-alignment with fundamentals (higher US real yields in 2H14), quickly escalated into a frenzy of dollar longs and ultimately over-valuation.

2) Dollar remained overvalued as major central banks embarked on an implicit – yet clear for all to see – game of FX manipulation to keep their currencies weak.

3) The Fed is erring towards a more dovish stance than the (already dovish) market expectations.

4) Other major central banks seem to be stepping back from material further easing and, in certain cases, from the zero-sum game of currency manipulation. B

“The fundamentals have spoken. The US dollar is set for a multiquarter decline, correcting a sizeable overshooting. Initially we envisaged a very gradual process, but the dovish Fed and the scaling back by other central banks of their FX fixation suggest that the risk is now for a more rapid correction lower.”