GBP/USD forecast - page 40
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The Pound Forecast to Slip below 1.20 vs US Dollar this Week
The British Pound to Dollar exchange rate was seen under renewed pressure on Monday as traders react to Theresa May's suggestions that she is willing to go for a full Brexit rather than trying to maintain the UK’s access to the common market.
In an interview on Sky News May said controlling immigration was amongst the top priorities in negotiations.
Since Thursday evening the Pound has fallen more than 2% against the greenback as GBP/USD broke the 1.22 support level and continued to move south as traders increased their bearish bet.
The decline spells for an increasingly negative outlook argues one prominent FX analyst.
"After last week’s resignation of EU ambassador Ivan Rogers and muddled ongoing talks with the EU, the pressure will continue to mount on the pound. The next support that lies at 1.1841 is within reach and could be reached by the end of the week," warns analyst Arnaud Masset at Swissquote Bank.
Analyst Shaun Osborne at Scotiabank agrees that the recent weakness fits the longer-term prognosis for an extended sell-off in GBP/USD.
"The longer-term technical picture looks very unsteady for the pound. We spot resistance intraday at 1.2175/80 and support at 1.2115. We think a daily close below 1.2175 will tip the balance of risk in favour of a renewed push lower to retest 1.1950/55. We favour selling minor GBP rallies from here," says Osborne.
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Could Sterling’s Recent Fall be Driven by Foreign Investors Withdrawing Capital?
A drop in inbound capital from investors buying into the bond market may be a significant factor in sterling’s recent decline, says Société Générale’s (SocGen) Kit Juckes in a note seen by PSL.
A major driver of currency value in the modern, ‘borderless’, financial world is foreign investor appetite for bonds.
Typically, this helps currencies with bonds which carry a higher yield whilst at the same offering the least risk of default.
The yield is the yearly interest the bond holder gets paid for buying the bond and is like interest paid from an investment.
Clearly, investors tend to seek bonds with higher yields to get a higher return and this increases demand for the currency of the country where the bonds are issued.
But SocGen’s Juckes adds a further dimension to the relationship by introducing the concept of ‘real’ yield.
The real yield is the bond yield minus inflation.
So, for example, if a bond has a yield of 3.0%, which means it pays the bond holder 3.0% interest per annum, and the inflation in a country or origin is 2.0% then the real yield is only 1.0%.
This is because in reality the bondholder is actually only making a profit of 1.0% taking into account inflation erosion.
According to Juckes, investors don’t just seek higher yields but actually seek higher real yields.
Using a chart comparing the real yield of the 10-year US Treasury Bond with the Dollar index, Juckes shows how there is a strong correlation between the two, and that falling real yields in the US are likely to forebode a weaker Dollar.
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BoA/ML "see GBP drop in Q1, but will buy the dip"
Bank of America / Merrill Lynch on sterling, this from their latest " FX Viewpoint: 2017: the 51 weeks ahead"
The Pound to Dollar X-Rate in Strong Recovery - Where Next?
Pound Sterling has defended a key resistance point against the US Dollar over the past 24 hours and we could therefore see downward pressures start to ease on the GBP/USD conversion.
We have seen GBP/USD plug a 31-year low already this week having reached 1.2037 on Wednesday, only to witness the exchange rate recover to as high as 1.23 in subsequent hours.
The conversion is now at 1.2250.
The recovery move has little to do with the Pound and everything to do with a broad-based US Dollar sell-off.
The Dollar has come under notable pressure following a much-anticipated Donald Trump press conference.
GBP/USD's ability to recover is important as it failed to make a daily close below the support line at 1.2160 once again.
This confirms the long-term floor for the exchange rate remains intact.
This should seel Sterling supported in the near-term.
Temporary End to the Dollar's Impressive Rally
The Dollar fell after President-Elect Donald Trump gave little new information on his economic plans at a press conference that was more focussed on his dealings with Russia, his personal life and his business empire than anything else.
What the Dollar needed was some solid information regarding his future plans to stay propped up.
"Sterling touched the lowest level against the US dollar since October’s ‘flash crash’, although this was driven by general dollar strength leading up to Donald Trump’s news conference. The US Dollar has subsequently pared gains, falling against all major currencies, as Mr Trump gave little away on anticipated fiscal plans. More policy details may be forthcoming in his inauguration speech on 20 January," says a note from Lloyds Bank Commercial Banking seen by Pound Sterling Live.
Ross Burland at FXStreet notes there was nothing to support the Dollar other than "everything is going to be great, the best, amazing".
"We need fundamental fiscal plans now from Trump, not presidential-rally-style hype," says Burland.
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GBP: More Downside On Article 50 Activation; Staying Short - Goldman Sachs
We see the path for the British Pound as a function of two things.
First, there is the question of where GBP/$ would trade in the event of a “hard Brexit.” We have used several approaches to show that Sterling could fall between 20-40 percent relative to pre-referendum levels, with a low of 1.10 for GBP/$ quite possible.
Second, what probability should markets assign to “hard Brexit.” In our minds, it has been this probability that has been moving the Pound around since June of last year. In particular, the political vacuum following the referendum meant that there was some probability that Article 50 might never be triggered. In the presence of large speculative shorts, this kept the Pound supported after its initial referendum fall. But the Conservative party conference changed that, with Prime Minster May committing to trigger Article 50 by March. We thought the market would price a greater probability of “hard Brexit” as a result, reiterating our near-term target of 1.20 for Cable in the days ahead of the 'flash crash'. The November High Court decision was a move back in the opposite direction, reducing in the market’s eyes the odds that Article 50 could be triggered by March and, more fundamentally, limiting how aggressive the government could be in its negotiating position. This buoyed Cable, pushing it back up towards 1.28 and pre-'flash crash' levels in mid-December (Exhibit 1). However, our underlying conviction is that Sterling needs to weaken quite a bit more, given that the trade-weighted decline is only 13 percent so far (Exhibit 2), well shy of our 20-40 percent range.
We think the most recent decline, sparked by Prime Minister May’s latest speech re-affirming her Brexit vision, is the start of that process, with the FX market only beginning to re-engage in the idiosyncratic Sterling down story.
Our 3-, 6- and 12-month forecasts for GBP/$ now stand at 1.20, 1.18 and 1.14, respectively, with risks tilted in the direction of a sharper, more front-loaded decline. Our conviction for this forecast rests on the fact that the fall in GBP is still relatively small in trade-weighted terms, something that has been overlooked, while we also think the market continues to under-price Prime Minister May’s commitment to trigger Article 50 by March. Taking into account that the Pound has fallen 13 percent from pre-Brexit vote levels, this is still well short of the upper bound of our range between 20-40 percent that we derive using various approaches (Exhibit 3).
We continue to think that – even with the decline since June – the Pound is not yet cheap and that more declines are coming. We remain short Sterling also in our Top Trade for 2017, where we are short GBP and EUR equally weighted against the Dollar.
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P.M May's Speech is No.1 Risk in Pound Sterling's Calendar
The outlook for Sterling rests almost exclusively on what Theresa May says in her first major set-piece on upcoming Brexit negotiations on Tuesday January 17.
May is expected to reveal details regarding her Brexit strategy on Tuesday and ccording to a spokeswoman, May will be, “setting out more on the negotiating approach to Brexit as part of preparing for the negotiations and continuing to be an outward-looking nation.”
From a Pound Sterling perspective, markets will be looking for clarity on how important single market membership will be.
At present we note that markets are pricing some kind of exit from the single market.
"The government has sent clear signals that the UK will leave the single market, but is ambiguous about whether to remain in the EU customs union or leave and negotiate a free trade agreement (FTA) with the EU," says Sarah Hewin at Standard Chartered.
The biggest risk to business is a disorderly Brexit: The UK walks away from negotiations, gives up on the transition and falls back on WTO rules to govern trade with the EU.
Those that think that a hard-Brexit is now fully absorbed into the price of the Pound need to think again.
HSBC warn of the prospect of a “diamond-hard Brexit: WTO trade rules, complete control over movement of people, and no more contributions to the EU budget.”
The GBP/USD will fall to 1.10 under this scenario say HSBC.
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May's Speech Won't Help Pound Sterling: Analysts
The outlook for the British Pound rests almost exclusively on what Theresa May says in her first major set-piece on upcoming Brexit negotiations on Tuesday January 17.
The Pound has suffered another bumpy ride this week, as concerns about the economic impact of a
hard-Brexit have lingered.
Sterling began the week on a shaky footing, following a Sky News interview in which Theresa May strongly implied that the UK would cease to be a member of the Single Market after it leaves the EU.
The Pound’s decline was only halted following Donald Trump’s poorly-received press conference which, emphasised the fact that markets appear to have previously focused more on the “good” elements of Trump’s plan, such as the fiscal stimulus, rather than some of the “bad” bits such as trade wars and the building of a wall between Mexico and the United States.
The rally proved short-lived as the Pound pared gains on the announcement that May would be delivering her speech on Tuesday January 17.
May is expected to reveal details regarding her Brexit strategy and according to a spokeswoman, she will be, “setting out more on the negotiating approach to Brexit as part of preparing for the negotiations and continuing to be an outward-looking nation.”
From a Pound Sterling perspective, markets will be looking for clarity on how important single market membership will be.
At present we note that markets are pricing some kind of exit from the single market.
"The government has sent clear signals that the UK will leave the single market, but is ambiguous about whether to remain in the EU customs union or leave and negotiate a free trade agreement (FTA) with the EU," says Sarah Hewin at Standard Chartered.