GBP/USD forecast - page 30
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Potential Reagan-Thatcher Redux has British Pound on Stronger Footing Against Euro and Dollar
Pound Sterling traded to its best levels in weeks against most global currencies as markets anticipate higher inflation in the UK and the potential for improved economic ties between the US and UK.
The GBP to EUR exchange rate delivered its best two-week run in eight years with a rally that’s powered it to its strongest in five weeks.
The UK currency is at a six week high against the Dollar.
The prime reason why the British Pound has surged lies with a sudden rise in developed market bond yields, particularly for bonds that expire over a long-term timeframe.
Investors are demanding a premium for longer-dated debt as they anticipate greater inflation, largely on the back of Trump’s promised fiscal stimulus agenda.
That the Pound was already notably undervalued when compared to bond yield differentials has caught market attention and they are quickly racing to reprice the currency higher.
However, a shifting geo-political landscape now that Donald Trump has won the US presidency is another reason investors have turned less pessimistic on the Pound.
"Watch for a US / UK trade deal, President-elect Trump's astonishing victory in all probability will give UK pro-Brexitors an 'ace up their sleeve'", says Peter Rosenstreich, head of market strategy at Swissquote Research.
Current negotiations between the EU and the UK have been relatively deadlocked with both parties’ leverages being relatively balanced.
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GBP/USD Technical Analysis: Is a New Trend Setting In?
Talking Points:
In our last article, we looked at the shifting paradigms in GBP/USD after last week’s Super Thursday batch of announcements saw the Bank of England remove the dovishness that was continuing to drive the Sterling lower. By acknowledging that higher inflation is being expected in the U.K., the bank effectively warned markets that additional rate cuts may not be in the cards, and ever since, Sterling has traded with a rather aggressive bid.
Of particular interest is the fact that this week’s price action has seen strength in the U.S. Dollar, yet GBP/USD has still run to higher-highs; indicating that even though the Greenback has been getting accumulated, the rate of buying in GBP has been even stronger and more brisk. This could setup a fairly attractive scenario should USD find an element of weakness so that stronger bid in the British Pound could drive prices on the pair higher.
Now that we have the possibility of up-trend continuation, traders would likely want to look for support to develop before triggering long, and there are a series of levels to watch for in the early portion of next week for that support to begin to form. At 1.2087, we have the ‘post-Flash Crash swing-low,’ and if prices fall below this level, that would invalidate the bullish bias as lower-lows would be printing. A bit higher at 1.2328 we have the swing-high from mid-October/early November, and this had given the most recent swing low along with support during the reversal around U.S. Presidential elections. But the more attractive area for that higher-low to develop would likely be the zone around 1.2500 in the pair, as this is a confluent level that had provided multiple points of resistance before the trend burst-higher; and as of yet this level has not been tested for support after the breakout.
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Lloyds: British Pound to Euro Exchange Rate Forecast to Extend to 1.20 if the 'Trump Trade' can Continue
GBP is forecast to extend its multi-day rally against EUR should the current reflation trade inspired by Donald Trump's election victory extend.
The British Pound to Euro exchange rate grinds higher above the 1.16 line at the start of the new week extending its advantage gained over the course of the previous week.
The move appears to be driven by persistent weakness in the Euro exchange rate complex and can be explained by the fact that the yields on government bonds in the US and UK are rising at a faster rate than those in the Eurozone.
In fact the EUR/USD is a whopping 1% lower suggesting a combination of Euro weakness and US Dollar strength are aiding GBP/EUR in maintaining its gains.
“The single currency fell further on Monday and reached 1.0773, its lowest level since January 7th, as market participants anticipate an acceleration of the Fed’s tightening path as Trump’s infrastructure spending plan is expected to boost inflation and growth,” says Yann Quelenn, market analyst at Swissquote Research.
Developed market bond yields continued to track higher, driven by expectations that a Trump administration will favour greater fiscal stimulus.
With 10-year Treasury yields ending at 2.15%, the highest since January, and up some 30bps since the US election.
Fed funds futures are pricing in an 85% probability of a December hike which ensures next month's meeting is sealed in the eyes of markets.
Gilt yields have also been pulled higher with the payments on UK debt due for expiry in ten years steadily climbing to 1.380 at the end of last week.
And today they have spiked to 1.49 per cent, the highest since the end of May – almost 1%higher than three months ago.
The Pound has moved higher in tandem as investors send money to the UK to take advantage of the growing yield.
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