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Citi: Longer-Term US Dollar Outlook Remains Negative, Buy GBP/USD Dips

Citi exchange rate analysis

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Strategists with Citi - the world's largest dealer of foreign exchange - have confirmed they believe the longer-term outlook for the Dollar remains negative.

Expectations for US Q2 real GDP growth have risen to 4.1% with Citi economists, however this strong economic growth outturn "now appears to be largely discounted into USD gains seen since mid April," says a note from the bank dated June 25.

The Pound-to-Dollar exchange rate has suffered alongside an host of other USD-based pairs since mid-April when a regime shift in global foreign exchange markets saw the Dollar fall into favour.

GBP/USD now trades at 1.3280 having been above 1.43 in April, the EUR/USD trades at 1.1685 having been as high as 1.24 in the same period.

"Looking forward, Federal Reserve Governor Powell’s de-emphasis on forward guidance, suggesting the possibility of discontinuing the dot plot and showing little desire to move into restrictive territory is potentially a longer-term negative for USD as are rising trade tensions though it is difficult to time this impact," says the note.

We reported on June 14 - the day the results of the mid-year Fed policy event were communicated - that the Dollar fell broadly even after the Federal Reserve raised its interest rate for a second time in 2018 and signalled to markets that it will soon step up the pace at which it tightens US monetary policy.

We suggested at the time the price action could be an hint that the two-month-long rally in the greenback may now be exhausted.

Concerning trade, Citi analysts believe the next one to two months may indicate whether such tensions escalate into full-blown trade wars; it is unclear whether analysts see a full-blown trade war as being good or bad for the Dollar.

However, the bigger political risk in the months ahead may be ‘domestic’, not external, say Citi, "since there is some tendency for USD to weaken approaching mid-term US Congressional elections in November."

Citi strategists are still bullish on EUR in the long term and hold a EUR/USD 0-3M forecast of 1.16 and a 6-12M forecast of 1.20.

The GBP/USD exchange rate is meanwhile forecast to edge higher:

"Fundamentally GBP remains cheap with it’s real effective exchange rate close to all time lows. Despite the fact that it’s difficult to envisage any UK-EU agreement at this juncture, it’s clear to see that GBP will reprice higher should one occur."

Citi hold a 0-3M forecast of 1.33 on GBP/USD and a 6-12M forecast of 1.35.

"Strategy for USD holders - buy GBP upon retracement," add Citi who expect an August rate hike at the Bank of England to keep Sterling supported.

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