- GBP/USD’s recovery could meet resistance near 1.2382
- Scope for technical supports at 1.2142, 1.1991 & 1.1990
- Fed’s golden QT opportunity potentially a risk multi-week
- But UK economic data could support short-term rebound
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The Pound to Dollar exchange rate entered the new week on the front foot and could have scope to rise further in the days ahead but the recent loosening of ‘financial conditions’ risks inviting a Federal Reserve (Fed) quantitative tightening (QT) response that would be a potential risk for Sterling multi-week.
Sterling rose against many of its major currency counterparts in Asia trading on Monday as last week’s Dollar selling continued but could soon face obstruction from technical resistances around 1.2302 and 1.2382 on the charts if its rebound continues over the coming days.
Dollars have been sold widely in recent trade including after official figures revealed a third successive decline in U.S. inflation for the month of December last Thursday while offering the Fed a glimpse of a possible victory in its battle to return inflation to the 2% target.
“Over time, we think the narrative may shift back in a more neutral or Dollar supportive direction—as US economic resilience becomes more apparent and our FCI [financial conditions index] framework suggests that the balance of risks is still tilted towards more Fed hikes rather than the cuts priced in the back half of the year,” says Kamakshya Trivedi, co-head of global foreign exchange strategy at Goldman Sachs.
“But for now it is important to acknowledge that recent fundamentals support the recent Dollar shift, and that seems unlikely to change in the near term,” Trivedi and colleagues write in a Friday research briefing.
Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of late September recoveries indicating possible areas of technical support for Sterling. Click image for closer inspection.
Trivedi and colleagues cite multiple factors for ongoing declines in Dollar exchange rates including the reopening of China’s economy and mild winter weather in Europe that has limited the extent to which elevated energy prices are able to burden economies across the region.
They also cite falling U.S. inflation alongside the hawkish policy stance of the European Central Bank (ECB) and the shifting position of the Bank of Japan (BoJ) as additional downside risks for the Dollar, all of which could potentially benefit Sterling in the short-term.
“The downtrend in US inflation means the FOMC is not far from ending its rate hike campaign,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
“The market now expects a Funds rate easing cycle (we expect several more cutsthan current market pricing). The FOMC’s prospective rate cut cycle is pushing down 2 year and 10 year US bond yields that are weighing on the USD,” Capurso and colleagues write in a Monday research briefing.
Capurso and colleagues say Wednesday’s U.S. retail sales report “would reinforce the idea higher interest rates are restraining demand –a key objective of higher official interest rates,” if the economist consensus proves right to expect sales to fall further for December.
Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. If you are looking to protect or boost your international payment budget you could consider securing today’s rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.
Falling retail sales might prove an added burden for the greenback but the loosening financial conditions evidenced by falling Dollar rates, lower U.S. bond yields and rising stock markets are both a growing problem and a golden opportunity for the Federal Reserve.
They’re a problem for the Fed because they undermine and neutralise the effect of its interest rate rises but they’re also a golden opportunity given the central bank is seeking to shrink its balance sheet through additional quantitative tightening during the months ahead.
Quantitative tightening reverses quantitative easing and the Fed has already said it’s likely to do more of it up ahead in order to reduce a balance sheet that was bloated by pandemic period bond purchases.
To the extent that Federal Open Market Committee members are minded to respond to the ‘excess demand’ in the government bond market by doing more QT there might be downside risks for GBP/USD as January gives way to February and the Fed announces its next monetary policy decision.
But in the meantime, the rebound in the Pound to Dollar rate potentially stands to be encouraged further by the employment figures and inflation data set to emerge from the UK on Tuesday and Wednesday.
Above: Pound to Dollar rate shown at weekly intervals with selected moving averages and Fibonacci retracements of 2021 downtrend indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.
