Best Pound-Dollar Exchange Rate for Over Two-and-a-Half Years

- GBP/USD rallies on renewed Dollar weakness
- Georgia Senate vote rerun dominates near-term
- GBP/USD technicals advocate for further gains

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• GBP/USD spot rate at time of writing: 1.3686
• Bank transfer rate (indicative guide): 1.3300-1.3400
• FX specialist providers (indicative guide): 1.3410-1.3590
• More information on FX specialist rates here

The Pound-to-Dollar exchange rate (GBP/USD) has reached its highest level in two years and seven months on January 04, as foreign exchange traders return to their desks from the holiday period.

GBP/USD reached 1.3688 on Monday, a level not seen since May 01, 2018.

Pound Sterling has rallied in value in response to the UK and EU agreeing a trade deal on Dec. 24, while an entrenched trend of Dollar depreciation extends further.

"The broad USD downtrend looks set to initially extend as resilient risk sentiment reduces the dollar's safe-haven appeal, providing underlying support for GBP/USD," says Andrew Spencer, a Reuters market analyst.

Stock markets have opened the new year in positive fashion, with investors continuing to look through the near-term concerns over the increase in covid-19 infection rates in some of the world's major economies, rather opting to look forward to a time when vaccinations herald a return to normality.

The Dollar has come under particular pressure against Asian currencies, with Asia's economies outperforming their western peers owing to their containment of Covid-19.

"The US dollar has continued to weaken at the start of the New Year with weakness most evident against Asian currencies overnight. The top performers have been the Indonesian rupiah and Chinese renminbi. The weakening trend for the US dollar against Asian currencies has been relentless since the middle of last year and there are few signs that it is set to reverse anytime soon," says Lee Hardman, Currency Analyst at MUFG.

"Asian currencies are continuing to benefit in part from the relative cyclical outperformance of Asian economies during the COVID crisis. The spread of COVID remains more contained within Asia allowing domestic economies to expand more without restrictions and fear impacting activity in comparison to in Europe and America," adds Hardman.

The Pound could meanwhile play catchup against the Dollar now that Brexit has taken place. While the Pound has indeed gained about 3.0% against the Dollar in 2020, this pales in comparison to most other major currencies which have notched up greater gains suggesting potential Sterling undervaluation.

"GBP/USD can trade closer to 1.4000 over the next few months following the Trade and Cooperation Agreement between the EU and the UK... GBP/USD is deeply undervalued relative to real interest rate and price deflator differentials," says Elias Haddad, Senior Currency Strategist at CBA.

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Spencer says technical indicators are advocating further GBP/USD upside: the 5, 10 and 21 daily, weekly and monthly moving averages are rising, "which is an unusual and strong positive setup".

"A sustained 1.3680 break would open the door to the 1.4377 2018 high. A close below the rising 1.3470 21 DMA, a base last week, would suggest a change in sentiment and scenario," says Spencer.

Looking ahead, politics will return to the fore for the U.S. Dollar this week as two Senate election reruns take place in Georgia, the outcome of which will determine which party wins control of the Senate.

"Should the Democrats win both of the runoffs, the resulting 50/50 split in the Senate would allow Vice President-elect Kamala Harris to cast the tie-breaking vote, handing the Democrats control; essentially, this would be a delayed version of the ‘blue wave’ election scenario coming to fruition," says Michael Brown, Senior Market Analyst at CaxtonFX.

The general rule of thumb was that a 'blue wave' would be positive for stocks and commodities and negative for the U.S. Dollar as increased stimulus measures are positive for economic growth.

According to poll modelling at FiveThirtyEight, the race  is close in both seats.

Democrat Raphael Warnock had a narrow lead of around 0.5 percentage point over Republican Senator Kelly Loeffler. Republican Senator David Perdue has an equally slim lead over Democrat Jon Ossoff.

"One of the biggest market reactions is likely to be in the US Treasury market if the Democrats exceed expectations and take both seats. It would open the door to a much bigger fiscal stimulus package under incoming President Joe Biden," says Hardman.

"In the short term, the prospect of US fiscal stimulus is likely to be welcomed by risk assets as it would help to strengthen the global recovery. It should ensure that the US dollar continues to weaken for now even if US yields move higher. In contrast, the market reaction should be limited in the Republicans hold on to control of the Senate," adds Hardman.

However, one analyst warns that the market's assessment of a 'blue wave' outcome might have shifted and a Democrat clean sweep might in fact be taken as a negative by the stock market, i.e. a positive for the Dollar.

"To date, it may be argued that a Republican-controlled senate would offer a balance against the potentially more progressive agenda of the Democrats under President-elect Biden. If the Democratic Party candidates both win, then we could see an equity market correction should investors worry that such a check won’t exist. This could precipitate risk-off behaviour in the FX markets, potentially lending the USD some safe-haven strength," says Clyde Wardle,
Senior EM FX Strategist at HSBC.

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