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Pound Sterling: Largest Weekly Gain vs US Dollar Since October 2022

November 6, 2023 - Written by Ben Hughes


Pound to Dollar (GBP/USD) Exchange Rate Consolidates Just Below 1.2400

After rallying strongly on Friday and posting the sharpest weekly gain for 12 months, the Pound to Dollar (GBP/USD) exchange rate posted 7-week highs just shy of 1.2430 on Monday.

The UK PMI construction index edged higher to 45.6 for October from 45.0 the previous month, but this was below consensus forecasts of 46.0 and the second-lowest reading since May 2020.

All sectors remained in contraction territory with a very weak reading for the residential sector.

Purchasing prices declined at the fastest rate for 14 years while sub-contractor prices posted the first decline since 2020.

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply (CIPS), commented; “High interest rates and low consumer demand for new homes continue to drag down the UK construction sector, with a lack of new tender opportunities and a cutback of existing projects being reported across the house building industry.

There was some evidence of stabilisation, but he added; “there is no doubt that UK construction is in a difficult period and there will likely be further challenging months to come.”

The dollar looked to recover some ground during the session and GBP/USD settled around 1.2380 after the Wall Street open.

The latest COT data released by the CFTC recorded a net increase in short Pound positions to over 20,000 contracts from 18,600 the previous week and the largest short position for over six months.

According to Socgen; “Short covering on Friday and the bounce over 1.23 will have reduced bearish bets.”

The UK calendar is relatively sparse over the next few days and Socgen added; “Consolidation and possible profit taking are not ruled out this week if UK GDP disappoints on Friday.”

Consensus forecasts are for a 0.1% GDP decline for the third quarter after a 0.2% increase the previous quarter.

The bank, however, considers that US trends are liable to be more important for the Pound.

It adds; “this may count for little if US yields remain soft and stocks push ahead.”

Socgen notes the importance of the 200-day moving average at 1.2435 and considers that a break above this level could lead to a further advance to 1.2500.

Scotiabank also noted the importance of 1.2435 and added; “GBP dips to the 1.23 area should remain well-supported, however. A deeper rebound to the 1.25/1.26 zone looks feasible as bullish trend momentum develops.”

Fed Chair Powell is due to make comments on Thursday and comments from other Fed speakers will also be monitored closely.

Bipan Rai, North American head of FX strategy at CIBC Capital Markets commented; “Even though last week’s statement was unanimous, I do suspect that Powell’s view isn’t very widely shared, so I suspect we will start to see a divergence between the doves and the hawks on the FOMC.”

He considers that next week’s CPI inflation print is going to be the best adjudicator on whether or not the Fed needs to hike rates again.”

He added; “If we do get a weak print then the focus shifts toward how much easing is being priced in for next year. If not, if we still do get a strong print, then we could see some dip buying in the dollar against several other currencies.”

According to Francesco Pesole, FX strategist at ING "It's mostly a dollar story."

He added; "We need to see consistent softening in U.S. data and I'm not sure this will happen. We think we might see a little bit of a rebound in the dollar in the next couple of weeks."

Nordea FX strategist Dane Cekov looked at the wider dollar outlook and added; "You could still see a somewhat weaker dollar in the short term, but if the (euro-dollar) rally continues, it needs to get some fuel from somewhere."

GBP/USD will find it much more difficult to make further headway if EUR/USD stalls.
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