Analysts Split on Whether GBP/USD Will Resume its Downtrend

Sean Lee at Forextell reckons, "overall the GBP looks to be coming back into favour, especially on the crosses, so buying dips on cable (GBP vs USD) makes sense to me."

From a trader's standpoint Lee says, "I’d suggest a wide and volatile 1.6250/1.6600 range over the next week or so with a definite buy-dip bias. On a more short-term basis, I favour buying near 1.6345/50 for a test of 1.6450."

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An initial softer USD tone yesterday didn’t really persist, with the weakness in equities helping to extend the USD’s strength against the higher yielders (AUD, CAD, ZAR), and initial USD weakness against the EUR and GBP fading by the end of the day.

The Return of Sterling Strength

The pound saw renewed pressure over the course of late August and early September as the Scottish referendum outcome tightened.

Citibank do however tell us that the return of the British pound's outperformance may be upon us:

"GBP outperformance should extend. Political uncertainty has subsided since the Scottish referendum, which should see increased market focus on strength in underlying data flow in the UK and potential BoE hawkishness. We believe investors do not discount sufficient risk for an early rate hike next year, suggesting there should be scope for GBP-positive rises in interest rate expectations."

A Softer Tone from US Fed = Softer Dollar

The US dollar's rally appears to have eased for now - the main culprit being a 'dovish' US Federal Reserve.

Expectations that the Fed will raise interest rates in mid-2015 has driven up US bond yields which has in turn seen the USD advance against the pound and other major currencies.

However, there are indications that key members of the Fed are keen to push the date of the interest rate rises back further.

This has tempered enthusiasm towards the USD.

Lloyds Bank Research tell us:

"There have been plenty of Fed speakers in the last few days and today Mester and Evans are due this evening, but the summary story is that the Fed is split. For the moment, while there is a significant hawkish minority, as suggested by the “dot charts”, Yellen and Dudley are effectively marshalling a dovish majority and today’s speakers are unlikely to change this impression.

"The slightly more dovish language has allowed a modest decline in short term yields in the last couple of days, and this has taken the edge off USD strength. With no US data of any note today, the USD should stay in a holding pattern against the other low yielders."

Just to Confuse Matters... Outlook Still Favours USD Say Morgan Stanley

As always, nothing is ever simple in the world of currency.

Analysts at Morgan Stanley reckon the outlook for the pound to dollar remains because the US Fed is bringing forward their interest rate hike expectations (a difference of opinion between Lloyds and MS then).

Commenting on the outlook for sterling dollar, Morgan Stanley say:

"As fundamentals and relative rate expectations in particular are likely to return as the drivers for GBP, we would expect GBPUSD to become vulnerable. The prospect of a BoE rate hike in 1Q15 has been factored in by the market for some time, hence the upward shifts of the Fed’s rate projections last week put the focus on the downside for GBPUSD, in our view."

Concerning the outlook for GBP/USD, Morgan Stanley say:

"We expect GBPUSD to come under renewed pressure. Although we would not rule out some further near-term volatility, we view rebounds into the 1.6700 area as providing selling opportunities. The move below 1.6460 generates a renewed bearish signal, returning the focus to the 1.6050 lows."