GBP/USD Falls as Billions of Dollars Worth of Funds Flow Into US Financial System

The US dollar exchange rate complex (USD) continues to appreciate in value against a host of currencies, including the pound sterling (GBP).

Latest data from one of the leading financial institutions we follow confirms billions of dollars are flowing into the United States on a weekly basis as global investors continue to buy into the US growth story.

As a result the pound sterling continues to suffer - the pound to dollar exchange rate (GBP/USD) is seen at 1.5844 at the start of the new week, this down from the high seen at 1.7181 set in mid-year.

The GBP to USD is 0.01 pct higher on a day-to-day basis following the release of a slightly disappointing non-farm payrolls report at the close of last week.

The euro to dollar exchange rate (EUR/USD) meanwhile remains under pressure with the pair starting the new week at 1.2389.

The under-par NFP report which read at 214,000 in October won’t cause Fed President Janet Yellen and her Fed colleagues too much of a headache just yet and the strong USD run higher is likely to continue.

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• P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

What is Pushing the Dollar Higher Against the Pound Sterling and Euro?

At present the only game in town for foreign exchange is differences in central bank policy.

Central bank policy determines the value of a currency through:

1) Controlling the the volumes of a currency in circulation - ie. the supply which in turn determines the price aka exchange rate.
2) Interest rates - this will determine the return an investor gets for his money.

With all bets on for a mid 2015 hike in interest rates at the US Federal Reserve global money markets are shifting cash back to the United States.

This is driving up the dollar as a result.

According to data from Bank of America Merrill Lynch, a huge $17.5bn inflows into US equity funds was seen over the past week, after $20bn in the previous week.

According to BofA, these flows account for the biggest 2 weeks of inflows since Oct 2013; note SPX melt-up of 11.56% from 10/15 intraday lows.

US bonds meanwhile saw $9.0bn worth of inflows marking the 7th straight weeks of gains for the asset class.

Meanwhile the British pound has found the going tougher as UK economic releases start to cool.

Much of the cooling is related to the Eurozone economic under-performance. Nevertheless, the pressures placed on the Bank of England to raise rates has eased considerably.

Until the United Kingdom starts to attract strong inbound currency flows the pound to dollar exchange rate will find it hard to rally.

The Euro Will Remain Under Pressure Against the Dollar

The euro is widely forecast to remain under pressure against the dollar, more so than the pound, as the Eurozone economy continues to under-perform.

We remain of the opinion, alongside the rest of the markets, that significant policy action will ultimately have to be announced at the European Central Bank in coming months.

“The trade in FX still centres around policy divergence,” points out analyst Kathy Lien at BK Asset Management reminding us that policy at the ECB, US Fed and Bank of England is what ultimately matters.

ECB President Mario Draghi's told us that the "main message" to take away is that "ECB assets will expand as others contract."  

“As long as there is a risk of additional easing from the ECB, the euro will remain under pressure.  However with speculators holding the largest amount of short positions since July 2012, now that the ECB meeting has passed EUR/USD is vulnerable to a short squeeze up to 1.26,” says Lien.  

BK Asset Management view any rallies in EUR/USD as an opportunity to sell at higher levels for an eventual move down to 1.2250.