GBP: Expect further downside against the USD and some other G10 currencies - TDS

Research Team at TDS continues to expect further downside for sterling against the USD and some other G10 currencies over the next several months.

Key Quotes

“Our outlook does suggest, however, that the pound should find a bottom and see a recovery in the second half of this year.”

“While some of the key near-term questions have been answered about the UK’s Brexit plans, we struggle to believe that the activation of Article 50 will be viewed as a positive for the currency. PM May seems to have a plan, but we are quick to note that no battle plan survives contact with the adversary. In this case, the focus for markets thus far has been on the UK’s negotiating position. That focus necessarily must soon shift to Europe. There, the political landscape is set to become considerably more complicated amid major election cycles in France, Germany, and other key members of the EU.”

“At the same time, we note it essential not to look at the GBP in isolation. Sterling’s performance exists in the context of developments in other major currencies. Here, the USD remains in a holding pattern overall. This remains, in our view, a correction in a broader USD uptrend as markets have dialled back on their enthusiasm for “Trump trades”. Ultimately, however, we expect the USD’s positive underlying dynamics to return to the fore and think the USD will resume its uptrend before too long.”

“Accordingly, sterling’s core currency fundamentals remain weak. The UK maintains the largest current account deficit among G10 economies by a wide margin. A slowdown in real income puts the consumer in a more vulnerable position while rising inflation pressures may also weigh on sentiment. The BoE has adopted a more solid footing and their next move may well be a rate hike, but this is still far off. The UK economy may be on a more solid footing than we expected, but markets are still not pricing in the first rate hike for nearly 17 months. We expect the Fed to deliver its third in June.”

“While cable may see additional two-way risks for the very near term, we are looking to become better sellers of GBPUSD. We cannot be certain that this week’s move to 1.2673 represents the top for the rebound off the mid-January lows below 1.20, but a break below near-term support at 1.2542 would improve our confidence in this view. Above here, 1.2775 represents a key threshold, in our view, while 1.2917 and 1.3059 should also offer stiff resistance on any additional move higher.”

“Looking lower, a drop below the 1.2415/35 support zone would target a move down to 1.2200 ahead of the post-flash crash low of 1.1986.”