Pound-to-Dollar Rate Rally Stalls after China's Olive Branch to U.S. but Charts Hint of Further Upside

Modified: Thursday, 12 September 2019 08:34 BST
Written by: James Skinner

- Rally stalls as GBP/USD heads for 1st daily loss this week.

- As investors bid for USD after China's olive branch to U.S.

- But charts show outlook turning positive, Friday close is key.

- Commerzbank says close above 1.2310 yields further gains.

- UBS tips gains for GBP/USD if Boris Johnson secures deal.

- BMO reiterates bearish forecasts for GBP/USD, EUR/USD.

The Pound stalled in its advance against the Dollar Wednesday and looked on course for its first daily loss this week as investors bid for the greenback in response to an apparent olive branch offered by China to the U.S., although some analysts are tipping the British currency for further gains up ahead.

Sterling had risen by just less than one percent for the week at the beginning of the Wednesday session but was on course for its first daily loss in three during the noon hours after investors warmed to the Dollar amid fresh hopes of progress in trade talks between the U.S. and China, which has clipped the Pound-to-Dollar rate's gain back to around 0.75% in late trading.

This was after Chinese officials were said to be propositioning the White House with an offer to buy agricultural goods ahead of talks aimed at de-escalating the trade war, which are set to take place next month. The report came as China unveiled a list of U.S. products it will exempt from its own levies announced earlier this year in retaliation against tariffs imposed by the U.S. due to alleged unfair trading practices and intellectual property theft.

The tariff exemption came months after a public consultation and was expected at some point but investors have taken it as an omen of progress in talks scheduled for October, prompting a renewed bid for the Dollar. Until Wednesday investors had been selling the Dollar against its rivals due to fears over the impact the trade war is having on the economy and outlook for Federal Reserve interest rates, although hope of a detente may have eased those concerns.

Above: Pound-to-Dollar rate shown at daily intervals.

"GBP/USD’s advance from its current September low at 1.1958 still has the May and June lows at 1.2506/59 in its sights. Between these levels and the mid-July high at 1.2580 the cross may struggle short-term," says Axel Rudolph of Commerzbank. "Once a weekly Friday chart close above the 1.2310 August high has been made, we will change our weekly outlook to a bullish one."

Rudolph and the Commerzbank team had bought the Pound-to-Dollar rate when it was trading at 1.2069 last week and have been targeting a move up to 1.2670 ever since. They've since locked in some of their profits with a 'stop loss' but are now looking to partially exit the bet when the market hits 1.25 and will walk away from it entirely when 1.2670 is reached. The idea was based purely on studies of trends and momentum on the charts.

Sterling had advanced into the Wednesday session with markets basking in the comfort provided by knowledge the UK parliament has been suspended until mid-October and that the Prime Minister's hands have been tied behind his back by the opposition and 'rebels' from within his own party. A Scottish court ruled Wednesday the suspension of parliament was unlawful, although the question will be decided in its entirety in a Supreme Court appeal next week.

Above: Commerzbank chart of Pound-to-Dollar rate with technical indicators displayed.

"The options for the government are narrowing. If Johnson wishes to keep his promise of leaving the European Union by 31 October, the only way he can achieve this without facing a legal challenge is to secure a deal with EU," says Dean Turner, an economist at UBS Global Wealth Management. "Any progress toward securing a deal with the EU could see the pound strengthen to round 1.30 against the US dollar. If a deal is brokered and agreed by Parliament, it could move higher."

Prime Minister Boris Johnson took no action to prevent Royal Assent being granted to an errant bill forced through the House of Commons by an opposition that, with Conservative Party MPs in tow, had thrown constitutional convention to the wind and hijacked the parliamentary agenda in order to impose legislation upon the government. The law now requires that Johnson request a third Brexit delay by October 19 if an agreement with the EU hasn't been reached and MPs haven't approved a 'no deal' exit.

Parliament's move has opened a constitutional can of worms and undermined the Prime Minister's hand in talks aimed at securing changes to the contentious and three-times-rejected agreement struck with Brussels by Johnson's predecessor Theresa May, but markets have bid Sterling higher because it's been seen as reducing the previously-elevated probability of a 'no deal' Brexit.

Above: Pound-to-Dollar rate shown at weekly intervals.

"We continue to anticipate that the balance of European geopolitical and economic forces will exert major drags on EURUSD and GBPUSD through year-end," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "In addition, both the UK and the Eurozone are heavily exposed to the US/China trade war due to their elevated shares of total exports in GDP."

Prime Minister Johnson has stuck by his "do or die" pledge to take the UK out of the EU on October 31 regardless of whether a deal has been agreed with the EU or not even after parliament's bill was granted Royal Assent Monday, although it remains far from clear how he will extricate the country from the bloc if a deal is not reached. However, one thing that's for certain is that the market now views a general election as all but inevitable.

Johnson sought the backing of MPs on two occasions in the last week but was rejected both times by parties that have called for a ballot around twice every week for the last two years. Those MPs say they want a third Brexit delay before going back to the ballot box and BMO's Gallo says such an extension of the Article 50 negotiating window now looks increasingly likely.

"The consequence of the delay, however, will be early elections which will probably occur in November or December. The result of these elections is extremely difficult to call, but both proBrexit & pro-EU governments will contain elements that have negative implications for the GBP," Gallo writes, in a note to clients. "The likelihood of another Brexit extension is keeping our 3M GBPUSD view just north of 1.20 (1.22), but we see the pair drifting lower again to 1.20 in 6M. We would caution though that both the 3M and 6M outlooks for the pair are laden with downside risks."

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