Pound-Dollar Rally a Signal the Worst is Over: FX Pro

Image © Adobe Images

The Pound to Dollar exchange rate is a further two-thirds of a percent higher at the start of the new week with the pair up to 1.2565, a development that could suggest the worst of the recent global Markets selloff is now over.

Alex Kuptsikevich, FxPro senior market analyst, says he now sees a smooth recovery in the Pound from recent lows, which comes in tandem with some easing of risk pull in global markets.

The Pound struck a multi-year low of 1.2155 two weeks ago, leading Kuptsikevich to query at the time whether a break below the psychologically significant level of 1.20 was possible.

But following last week's 1.89% gain Kuptsikevich now believes Sterling is signalling the recovery in risk demand has evolved from a corrective bounce after oversold levels to one that is more entrenched.

"Interestingly, the Pound is giving even stronger signals of risk demand recovery than Bitcoin or the US stock indices, where we saw new multi-month lows inside on Friday afternoon," says Kuptsikevich.

"The performance of GBPUSD as one of the most liquid yet risk-sensitive currency pairs points to a return of buyers that has gone further than a formal oversold correction after a three-week-long sell-off," he adds.

The FX Pro analyst says the currency market often acts as a leading indicator of a reversal of established trends, and we are likely to see one such signal from the British currency.

"A recovery in risk demand in the markets and GBPUSD reaching 1.2750 as early as this week could be an additional confirmation signal that forex was the first to recover from the bearish pressure," says Kuptsikevich. (Set your FX rate alert here).

However, Kuptsikevich would want to see GBP/USD consolidate above 1.3000 before saying markets have fully digested the crisis of recent months.

Above: GBP/USD daily chart. Has the low been reached?

He says 1.30 is a level that has become the informal line separating the most acute periods of market fear from attempts to recover to normalcy over the past six years.

Pound Sterling opened the new week close to 1.25 after climbing from barely more than 1.22 last week and following a cacophony of supportive domestic and international developments including more favourable UK economic data and a softening of the U.S. Dollar.

"A tentatively brighter mood for global markets lifted the euro, sterling, and Canadian dollar to multiweek highs. Data is starting to a paint a more resilient picture of global growth which by extension is curbing demand for safety in the U.S. dollar," says Joe Manimbo, Senior Market Analyst at Western Union Business Solutions.

Domestically, stronger than expected first quarter UK wage growth, strong UK April retail sales figures and a tentative ebb lower in all-important U.S. government bond yields have each either engineered or otherwise supported a favourable turn higher in the spread or gap between U.S. and UK yields.

But the rebound in the Pound-Dollar rate may also have been helped by the sharp bounce in Renminbi exchange rates given the extent to which both currencies were impacted in April when the Chinese currency slumped in response to the now-easing ‘lockdown’ in the world’s largest port city, Shanghai.

The move further signals an improvement in broader global investor sentiment.

“Some support measures for the Chinese economy and some stability in the Chinese renminbi have helped usher in a period of consolidation in FX markets. This may well last into next week, although we would consider this a pause not a reversal in the dollar's bull trend,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.