GBP Forecasts Downgraded By TD Securities Who Warn USD Rally is Only Half Complete

Pound to Dollar Rate Today: The dollar rally continues as better-than-expected US data confirms the currency will be able to rely on the US economy to continue delivering superior performances to that of the United Kingdom.

In this article we hear from analysts at TD Securities who tell us they remain USD bulls going into 2015 while also turning more cautious on the GBP's outlook.

At the time of writing we see fresh all-round USD demand as ECB President Draghi talks the Eurozone down - there seems no reason to buy anything but the USD in this environment.

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Near-Term Risks to GBP to USD Rate

Keep an eye open for the following risks to direction in the sterling dollar rate:

1. Wedneday: UK Services PMI, expected to read at 58.5. (Came in below expectations pushing GBP lower).
2. US ADP Data: (Came in above expectations at 230K, USD is bid higher).
3. Thursday: Bank of England MPC decision, no changes expected. (No change to policy, no reason to back GBP).
4. Friday: US Non-Farm Payrolls Data expected to read at 231K.

"The U.S. dollar rallied to a new four and a half-year trade-weighted high in the mid-week session after Republicans secured both the House and the Senate. A Republican majority Congress during a Democratic presidency, was last seen in 2006, and is generally seen as a pro-business, pro-economic growth political backdrop," says Omer Esiner at Commonwealth Foreign Exchange.

The ADP reported that private sector companies added 230,000 new jobs in October, better than the 220,000 forecast and yet another month of 200K+ jobs growth.

"UK services PMI came in weaker than expected yesterday, that saw GBP/USD make a new year low of 1.5869. However, there was a firm rebound in GBP/USD despite 2-year rate spreads moving in favour of the USD after some decent US numbers yesterday. Focus turns to industrial production data this morning," says a note from Lloyds Bank Research.

Longer-Term Forecast for Sterling Dollar

TD Securities have advised they have downgraded their forecast on the GBP's outlook as the currency struggles to recover after the Scottish referendum and amid a run of soft domestic data releases.

"Alongside slower growth in the Eurozone and broader market turmoil, sluggish UK data have pushed market expectations for a BoE rate hike deeper into next year," says a note on the matter. 

TD concede that risks are rising that the BoE delays the start of the tightening cycle.

"But we are maintaining our call for a Q1 move and expect policy normalisation to be broadly supportive for the GBP over 2015," says the note, indicating there is no drastic downside call to GBP valuations to be made as of yet.

The USD Rally is Only at its Mid Point

The broader dollar exchange rate complex is meanwhile predicted to maintain strong upside momentum.

TD Securities tell us:

"Our long-term USD-bullish conviction remains intact.

"Despite recent scares, the Fed is moving towards normalising monetary policy and we expect the US economy to continue growing relatively robustly in 2015; monetary policy divergence and asymmetrical growth prospects between the US and its major-economy peers collectively point to broader USD gains in the next 12 months or so still, we believe.

"Beyond that, we think the USD is in the midst – quite literally the mid-point – of a multi-year secular bull trend which relatively tighter (or certainly less loose) monetary and USD-liquidity conditions should promote, as the Fed's QE programme winds down."

BUT The Dollar Could Still Weaken in the Near-Term

However, near-term risks may be shifting modestly to the downside for the USD suggest analysts at TD Securities.

"Last month, we remarked that despite our bullish leanings, we were concerned that the USD rally had become over-extended and that the rally was likely to end soon with a "whimper rather than a bang".

"Indeed, after three months of solid gains totaling nearly 8.8%, October is likely to end with the DXY trading modestly lower."

Moreover, a couple of factors suggest to the team at TD Securities that the pause in the USD rally may extend into year-end from here:

First, IMM data shows speculative FX players have accumulated a record net long USD position in recent weeks. It may simply mean that the USD cannot appreciate further until positioning is more balanced and fresh, supportive information emerges.

Second, analysts also note that seasonal trends favour USD softness generally into year-end. The "typical" scale of USD weakness (as measured by the DXY's performance) is not that pronounced but the pattern is fairly consistent.

The USD normally peaks in early November and eases through until the New Year.

TD's research shows that the USD has fallen nearly 2/3 of the time in December since 1974, with an average decline of 1% over the month. All else remaining equal, that would leave EURUSD very close to our long-held 1.29 year-end target.