GBP/USD Rate Ripe for a Turn Lower: BMO Capital

Strategically, it is suggested that the 1.4525/50 region remains the better spot to be selling the GBP to USD pair and we would look for initial resistance around 1.4410 this week.

The British pound has recovered off three month lows to reach 1.44 against the US dollar in mid-week trade in an atmosphere of general dollar weakness.

The dollar appears to be in the driving seat when it comes to the GBP/USD pair and while the world's largest currency has had a strong May it appears to have come 'off the boil' this week.

The British pound’s relief is unlikely to last however with most analysts forecasting near-term pressures and giving their suggestions as to where the best points to sell the exchange rate ahead of a return to weakness are.

Last week the Bank of England issued a number of stark warnings about the implications of Brexit while making few changes to growth and inflation forecasts.

The market liked this and actually bought sterling over the hours that followed; indeed we are finding that the EU referendum continues to hold sway over the UK currency.

GBP has found a bid of late on some recent polling data that shows the Remain vote is edging ahead.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3347▲ + 0.15% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2893 - 1.2946
**Independent Specialist	1.316 - 1.3213 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Looking at the 'Short' Side of the Sterling Trade

Technicians and foreign exchange analysts are quite confident in their view that strength in the GBP will likely prove temporary in nature.

Stephen Gallo at BMO Capital continues to favour short positions on the British pound for horizons of 1M and under.

Strategically it is suggested that the 1.4525/50 region remains the better spot to be selling GBPUSD, “but we would look for initial resistance around 1.4410 this week.”

With the short-side of the GBP trade far less crowded than its Q1 peak, persistent softness in global risk over the course of the next week BMO reckon we could see the 1.4250/75 daily trend-line support area tested.

Looking at the “short-side of the GBP trade” in a little more detail, what is being referred to here is the portion of the market betting against sterling.

So many people were betting against the currency in Q1 that it was becoming increasingly difficult to chase the currency lower as everyone had the same view on the outlook.

It is this crowded bet that could be attributed to a good chunk of the recent recovery it is argued.

Recent strength has shaken out many of these negative bets, the more bets that are taken out the more self-sustaining what is in essence a technical move becomes.

With the market more or less in balance now there is the real chance of further strong declines should everyone jump onto the trade once more.

Expect any lurches towards a Brexit by the bookmakers to be one such trigger for such a move.

“We remain constructive on the GBP over time, but with short positioning having been cut back and political risk still elevated risk reward does not look attractive for new long positions at this time,” say BNP Paribas in a note on the UK currency released at the start of the new week.

More Dollar Strength on Offer in May

Fed officials, even doves like Rosengren and Kaplan, are signalling that June is live and 2-3 rate hikes "make sense".

That, along with strong April retail sales, resuscitating Q2 growth hopes and a surge in the April CPI that was more than just a gasoline story, has seen interest rate markets finally "get the message", June Fed hike probabilities having risen from near zero to 15% in recent days, while the yield curve is at its flattest levels since 2007 and the Bund-Tsy 2yr spread is pushing in the USD's favour again.

FOMC minutes this week and a long list of Fedspeakers in the next two weeks including Chair Yellen, Deputy Chair Fischer, Dudley, Tarullo, Bullard, Williams, Harker, Kaplan and Powell should see June hike probabilities continue to firm, probably toward 25% before they stabilise.

“Highly doubtful that the USD will continue to ignore that. Upside risks to the USD should not extend much beyond May payrolls (3 June) though, striking Verizon workers and auto supply disruptions after the Kumamoto earthquake could see May payrolls print as low as 100k,” says Rob Rennie at Westpac Global Strategy Group.

Westpac continue to advocate for further dollar strength through May, a month that is historically a positive month for the Greenback.