Pound / Dollar Rate Slumps on QIR Disappointment, But GBP/USD Could Benefit if Dollar Strength Runs Out of Steam

Just as we thought sterling might finally be finding support at around 1.60 against the US dollar recent losses confirmed the weak spell is not yet over.

Last week’s 0.78% decline took the UK currency to its lowest reading against the dollar in more than a year and technical assessments are pointing towards a near-term target of around 1.5700 before it finds further support.

At the time of writing the British pound to dollar exchange rate conversion (GBP/USD) is 0.78 pct lower on a day-to-day basis at 1.5794.

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The Threat (And Opportunity) Posed to Pound Sterling

Wednesday brought with it the most important event of the month for the British pound and the direction in GBP/USD.

The Bank of England, in their latest inflation and economic forecasting report, indicated they are in no rush to raise interest rates. (Full details here).

Money markets are currently pricing in the first rate hike for Autumn 2015 - this has seen currency markets sell the GBP in response.

Greg Anderson at BMO Capital says he remains negative on the pound to dollar pair:

"The outlook for the UK economy and for inflation has cooled since the last report was released, which will presumably show up in the forecasts and commentary.

"With GBP behaving so tamely on crosses, we’re not sure that a downgrade to the outlook and an associated pushing back of the date of BoE rate hikes is really in the price.

"The other issue that makes GBP an attractive short for USD bulls is the fact that positioning is relatively neutral.

"We look for 1.5800 to 1.5950 to be the range ahead of Wednesday, but if the range breaks, we would think it would be through the bottom."

Could The US Dollar Rally be Weakening?

While the pound faces potential volatility in the mid-week session it could benefit from a stalling in USD strength.

It appears that the USD rally is running in to positioning issues and out of catalyst events (for now).

The USD rally over the past four months has been relentless; "last week’s extension of that rally made it 16 of the last 19 weeks that the USD has gained. Positioning data suggests the move may be about to fade in to a consolidation phase. A lack of important data and events is an issue that may encourage a bit of stop tightening and profit taking," says Anderson

Currency Positioning Amongst Speculators

According to the CFTC’s Commitment of Traders survey, leveraged investors’ positions in individual currencies aren’t extreme.

The only possible exception is short-EUR and long-USD. When positioning is said to be "long-USD" we are loosely suggesting that so many people are invested in the USD that it could in fact be difficult to find enough buyers to really continue pushing the rally.

The short side of EUR was at 83% of its historical maximum on November 4th, while the short side of JPY (long side of USDJPY) was at 46% of its record.

And, "while the CFTC data suggest room for additional JPY shorts, the room for additional USD longs is probably becoming limited and this could well keep a lid on USD strength heading into year-end," says Anderson.

Fedspeak Will Determine USD Direction

The upcoming week isn’t completely empty. It is highlighted by a litany of Fed speakers, European GDP data and Chinese trade figures.

The theme for the week ahead in the US is Fedspeak.

Anderson tells us what to watch out for:

"A number of FOMC participants are scheduled to speak about the economy and/or monetary policy, including FOMC Governor Yellen on Thursday. She will kick off a Fed/ECB conference in Washington. Given the fact that she has already spoken over the last week, markets may pay more attention to other speakers.

"The week’s docket includes Kocherlakota, Plosser (Weds), Bullard (Weds), Powell (Fri) and S. Fischer (Fri).

"The most important data point is likely to be the Advance Retail Sales reading for October, to be published on Friday. Our economists are predicting a +0.2% MoM increase in overall retail sales and ex-auto sales."