November 27, 2023 - Written by John Cameron
STORY LINK Pound to Dollar Technical Forecast: "Positive Technical Undertone," say Scotiabank
The Pound to Dollar exchange rate hit 12-week highs just above 1.2640 on Monday before consolidation around 1.2625.
The relatively light economic calendar this week will tend to increase the importance of more technical factors.
One significant element will be month-end trading.
According to Barclays; “Our proprietary month-end rebalancing model indicates a broad-based, strong dollar selling signal by month-end. This signal is in stark contrast to the previous three months.”
It adds; “In particular, the sharp recovery in US equities post-Fed and moderating inflation prints will likely trigger more "re-balancing" needs to sell dollars at month-end. Our model suggests that this dollar-selling signal is broad-based and consistent across G10s.”
The US data on Monday reported a decline in new home sales to an annualised rate of 679,000 from a revised 719,000 previously
Despite weaker data and currency losses, ING is cautious over selling the dollar at this stage, especially with markets already pricing in 80 basis points of easing by the end of 2024.
ING also notes that carry trades are back in popularity, especially with declining volatilities.
According to the bank; “We have seen this theme several times this year already, and it is not a dollar negative. It is a negative for the funding currencies like the Japanese yen and the Chinese renminbi.
In contrast, MUFG expects that stronger risk appetite will hamper the US currency; “It leaves the US dollar vulnerable to further weakness in the week ahead if investor risk sentiment continues to improve.”
ING added; “Until we get some clear dovish communication from the Fed or US data is materially weak enough, we think this dollar drop might have come far enough for the time being.”
According to Colin Asher, senior economist at Mizuho Bank the dollar can weaken further; "Expectations are that U.S. rates have peaked which suggests it's time to get out of the dollar."
He added; "U.S. equities have now completed four weeks in a row of gains and that's also weighing on safe-haven demand for the dollar."
According to JP Morgan; “It is premature to expect the dollar to reverse the uphill journey it started in 2021. While a large portion of the uphill climb may have been covered, one may think of the current stage as a transition to a tricky ridge amid low visibility, with several descents and ascents, even to new highs, till the ultimate destination becomes clearer.
It added; “The culmination of the final descent (i.e. sustained, double-digit USD weakness) will require not just Fed cuts, but also for global growth to broadly improve.”
Rabobank considers that markets way have jumped the gun; “It is clear from the sharpness of the move across asset markets in the past week or so, that the CPI inflation release was a pivotal moment in the market’s interpretation of the outlook for Fed interest rate policy. That said, despite the strength of the initial reaction, we anticipate that the turnaround in the USD will play out over a longer period.”
The latest CBI retail sales data was released on Monday.
According to Scotiabank; “The volumes of sales measure rose to –11, from –36 in October, suggesting there is some life in the hard-pressed British consumer.”
As far as GBP/USD is concerned, it added; “New highs for the move up and solid-looking DMI oscillators give the GBP a positive technical undertone. Cable closed out last week above the 50% retracement resistance (1.2589) which targets additional gains towards 1.2720 (61.6% Fib) now.”
According to Barclays, UK fiscal policy could be important with higher minimum wages and lower National Insurance Contributions.
It added; “it has the potential to give a hawkish MPC member pause for thought and raises the probability that they might want to wait beyond August 2024 to see a return to underlying sequential wage profiles in data for June and July.”
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TAGS: Pound Dollar Forecasts