GBP/USD Rate Strength to be Short-Lived as Economists Warn USD Weakness Won’t Persist

The GBP to USD conversion has nudged higher thanks to a broad-based decline in the US Dollar, but analysts believe strength in this maligned exchange rate will likely be short-lived.

The GBP/USD exchange rate has traded back towards 1.33 as the UK currency takes advantage of a broad-based USD sell-off which was triggered by the release of some below-expectation GDP data.

The question becomes whether the move above the 1.3050 base that has formed over the course of July, is one that can be sustained.

Not so say BNP Paribas, who argue USD weakness is unlikely to persist as they believe Fed communications over the coming weeks will shift further in a hawkish direction, forcing the market to increase pricing for a September Fed hike.

Two key events are likely to be the minutes of the July meeting (released 17 Aug) and Yellen’s Jackson Hole speech (26 Aug).

“We remain bullish on the USD accordingly and continue to recommend short GBPUSD,” says a note from BNP Paribas.

It is not just BNP Paribas who see spikes in GBP/USD as invitations to enter fresh bets against the Pound.

Strategists at Morgan Stanley have told clients that they continue to see value in chasing the Pound lower against the Dollar.

Strategists entered a short trade on GBP/USD on 14th of July when the exchange rate reached 1.35 and seek to take profit once the pair has fallen to 1.25. (A level also being targeted by ANZ Research.)

The structure of the trade does make concessions for bouts of GBP strength as a protective stop-loss is set at 1.38.

“We see good risk-reward with selling GBPUSD on rallies too. The risk to this trade is that any broader USD weakness limits any downside in GBPUSD for now,” say Morgan Stanley.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3354▲ + 0.21% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.29 - 1.2953
**Independent Specialist	1.3167 - 1.322 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Position for US Dollar Weakness say Morgan Stanley

However, there of course those that are expecting a further depreciation in the Greenback.

Whether or not a broadly weaker USD plays into a stronger GBP/USD remains debatable as it is conceivable that strength in EUR/USD and weakness in USD/JPY could push the overall value of the Dollar lower while GBP/USD itself manages to weaken.

Nevertheless, one would expect downside damage to GBP/USD to be curtailed on the event of a broad-based USD slippage.

In a weekly client brief Morgan Stanley say they see the USD "looking south" from here saying the Fed has little to gain by hiking rates early.

"Hence, we regard the recent rise in real US yields that has supported the 4% USD rally seen since May as unsustainable," says strategist Hans Redeker.

Morgan Stanley's long-held framework suggesting a combination of high global debt, capacity overhangs and resulting low returns on investment should keep deflationary pressures intact.

"The impact that this environment will have on financial markets via a flattened yield curve and subdued inflation expectations should further support our weaker USD view, even though there have been recent upside surprises in US economic data," says Redeker.

Accordingly, USD should trade lower from here, and with markets positioned long in USD it should be expected that, initially, relative positioning and not relative fundamentals will drive markets.

What is the risk to this stance?

"A further tightening in US labour conditions leading to higher wage growth, pushing US inflation expectations into an upward trend," says Redeker.

Currently falling US corporate profitability is unlikely to open corporate wallets for higher wage compensation easily.

GBP/USD Technicals: A Directionless Market

The GBP/USD’s late-July advance does remain well within recent ranges and charts show that support around $1.3060 is providing the floor.

The upper end of the range is defined by the 23.6% Fibonacci retracement of the Brexit sell-off from $1.5018 to $1.2796 at $1.3320 has capped the upside.

According to Hantec Market’s Richard Perry, “momentum indicators continue to struggle in their unwind with the RSI stuck in the low 40s and the Stochastics plateauing around 50. I fully expect this move to resolve to the downside as the bears return.”

According to Perry, the hourly chat reflects the consolidation with the hourly RSI oscillating between 30/70 and the price having posted a series of lower highs at $1.3310, $1.3290 and now $1.3247.

“For now there is little direction and perhaps the market will be waiting for next week’s PMI data and if not certainly the Bank of England monetary policy. Near term support at $1.3115 is protecting the more significant support around $1.3060,” says Perry.