The GBP/USD Rate is Expensive Beyond 1.25 say UniCredit, Barclays see More USD Strength Ahead

The GBP/USD rally is projected to fade as market participants push the Trump trade further and lingering concerns about the UK economic outlook in this time of Brexit come back to the fore.

Mid-week trade sees Pound Sterling move higher against the US Dollar amidst a broad-based recovery for the UK currency.

Sterling remains in a short-term recovery uptrend against the Greenback that has seen it rise from a floor of support located near 1.2080 to the present levels around 1.25.

The 1.25 level is important as it could form the new upper-bound of an emerging range.

Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London says he does not see Sterling heading above 1.25:

“We believe GBP-USD is very unlikely to trade sustainably above, 1.25 given ongoing political uncertainty, the possibility of the economy deteriorating further down the road and the potential for adjustment to the economy’s C/A as capital flows slow.”

UniCredit expect more GBP downside as uncertainty over the UK’s economic future remains firmly in place.

As a reminder of how fraught the process could be the UK media has been awash on the morning of November 15th with news that the UK government actually has not Brexit strategy in place.

On the data front, UniCredit believe Sterling will struggle to find solace from this week’s inflation data.

Typically rising inflation boosts a currency as markets anticipate interest rate rises at the Bank of England designed to limit inflation.

Rising rates are typically positive for a currency - the perfect example being provided by the US Dollar at present.

However, it is now almost a given that inflation at home will rise on the back of GBP depreciation and that the BoE will see through that.

In short, markets reckon the Fed will be more aggressive on interest rate rises than their colleagues at the Bank of England, thereby limiting GBP/USD’s upside potential.

That said, UniCredit are not actually particularly bullish on the USD as they regard the Trump bounce with suspicion.

"The lack of visibility regarding the new US economic policies makes it dangerous to extrapolate this week’s momentum. The main downside risks stem from tariff barriers to trade, which would undermine US growth and generate negative spillovers globally. Moreover, any positive growth impact from  potential fiscal stimulus would turn into a drag on growth when spending is ramped down again," say UniCredit.

Analysts maintain their bearish stance on the Dollar which should suggest the GBP/USD faces little major downside damage.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3323▼ -0.02% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.287 - 1.2924
**Independent Specialist	1.3137 - 1.319 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Barclays see More USD Strength

The US Dollar is tipped to extend recent strength thanks to ongoing expectations on the implementation of anti-trade policies and fiscal largesse, including infrastructure spending, reignited inflation expectations.

According to analysts, these will continue translating into steeper core yield curves supporting USD outperformance vs. high yield FX, while anti-trade action is likely to weigh heavily on small open economies with large external imbalances.

"We expect Emerging Market and high-beta foreign exchange to continue to weaken against the USD, while Developed Market and safe-haven currencies can face increased volatility, as a steeper UST curve supports the Dollar while heightened policy uncertainty pulls in the other direction," say Barclays in a client brief released at the start of the new week.

Note too that market participants anticipate an acceleration of the US Federal Reserve’s interest rate raising path as Trump’s infrastructure spending plan is expected to boost inflation and growth.

Market expectations for a December interest rate rise are stacked at 90% - almost a guarantee that the Fed will pull the trigger.

However, more importantly, expectations for subsequent rises in 2017 have also risen and this is where the Dollar will find more fuel.

The promise of higher yields in the United States over coming years is likely to see a large repatriation of capital that has for years been parked in higher-yielding markets which should drive up demand for the Dollar. 

“Eyes are now turning back to the possibility of an interest rate hike by the Federal Reserve before the end of the year. A Trump win had initially cast doubt on the probability of a rate increase, with the markets pricing in just a 50% chance of a hike on election night; however, this has since rebounded back,” says Fiona Cincotta at City Index in London.

With unemployment historically low and Trump’s heavy spending plans taking shape, inflation could well charge higher more quickly than initially forecast.

“Two rate rises had been pencilled in for next year, but if Trump decides to front load his spending then we could expect more rises through the year, resulting in the dollar pushing further northwards,” says Cincotta.

Fed Chair Yellen is set to speak on Thursday and the focus is expected to be on the implications of the presidential elections and the rate hike outlook for not only December but also 2017.