British Pound to Dollar Rate: GBP Still A “sell On Rallies” Against US Dollar
20 March 2016, 15:01
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One of the best performing currency pairs of the latter part of the week has been the pound to dollar conversion.
The rate has moved higher as the US dollar is hampered by the US Federal Reserve while the pound’s central bank, the Bank of England, provides some upside impetus.
The result is that GBPUSD has cleared above 1.4396 resistance and now approaches 1.4500 on some decent buying interest over the past 24 hours.
CitiFX Technicals say they are maintaining a stance of selling the pound on rallies noting the exchange rate remains subject to a bearish technical outlook with longer term support at 1.3508-1.3682 being viewed.
These targets are the lows from 2001 & 2009.
However, analysts at the world’s largest FX dealer caution the move lower could likely be delayed by the FOMC’s more dovish outlook and near over-extended GBP short positioning.
US Dollar Outlook Softer as it Enters ‘Hibernation’
There are further suggestions that the lion’s share of the US dollar’s strength has now passed.
No doubt, these suggestions will only become more commonplace on the back of news that the US Federal Reserve is only likely to raise interest rates twice in 2016, down from the four envisioned at the end of 2015.
Without this interest rate support the dollar will likely struggle as the vast flows into the US seeking higher investment yields are put on hold as a result.
Indeed, it has been a disappointing start to the year for dollar bulls. It is not long since the overwhelming market consensus was envisaging a turbocharged USD for 2016 across the board, with some predicting EURUSD falling to parity and below.
“But fundamentals matter. Misalignments from equilibrium can be persistent, but in the end they do correct,” says Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London.
UniCredit have been arguing for some time, since mid-2015 in fact, that the US dollar rally was overdone and that the exchange rate had approached extreme overvaluation levels.
Developments in recent months suggest that the market is becoming increasingly aligned with this view.
The USD vs. majors is now down more than 5% since mid-January and the broad index (which includes EMFX) is down in excess of 4%.
Reasons Why the Dollar Will Under-Perform Going Forward
UniCredit cite four reasons why the dollar’s time in the sun could now be over:
1) What began as a re-alignment with fundamentals (higher US real yields in 2H14), quickly escalated into a frenzy of dollar longs and ultimately over-valuation.
2) Dollar remained overvalued as major central banks embarked on an implicit – yet clear for all to see – game of FX manipulation to keep their currencies weak.
3) The Fed is erring towards a more dovish stance than the (already dovish) market expectations.
4) Other major central banks seem to be stepping back from material further easing and, in certain cases, from the zero-sum game of currency manipulation. B
“The fundamentals have spoken. The US dollar is set for a multiquarter decline, correcting a sizeable overshooting. Initially we envisaged a very gradual process, but the dovish Fed and the scaling back by other central banks of their FX fixation suggest that the risk is now for a more rapid correction lower.”
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