Dollar Comeback Hitting GBP And EUR


Having hit a multiyear high of USD1.72/GBP on July 1, the British pound has succumbed to a pullback in the dollar in recent days. Sterling is now tentatively pushing through key short-term support at USD1.69/GBP, which if confirmed would set up another leg down towards US$1.63/GBP.

Following the break through resistance at USD1.70/GBP we targeted additional sterling gains to USD1.75/GBP, while warning that the pound was particularly vulnerable at this point to any deterioration in the macro data flow. Indeed, given the extent to which buoyant economic growth prospects have been priced in (consensus growth for 2014 is around 3%) and hawkish expectations for monetary policy (the short sterling futures market is positioned for a cumulative 125bps in policy rate hikes by end-2015), it is more likely at this stage that data will disappoint rather than exceed expectations.

However, much of the move in recent days has come from the dollar side, with the trade-weighted sterling index continuing to increase. As the chart below shows, the movement in USD/GBP since early 2013 has resulted primarily from a broad-based sterling appreciation, while the most recent fall in USD/GBP has come from a sharp upswing in the dollar. This in turn has been underpinned by a gradual recalibration of interest rate expectations as strong US labour market gains have pulled forward the expected date for the first hike in the US Fed funds rate. The above consensus Q2 GDP print released on July 30 (4.0% SAAR compared with an upwardly revised -2.1% in Q114) has further confirmed that the slowdown in the first few months of 2014 was a temporary weather-induced soft patch amid a multiyear recovery.

Sterling Slides
UK - Exchange Rate, USD/GBP

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Geography: United Kingdom