GBP/USD Rate Hits A 10-Week Best, Move Looking Overdone

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Pound Sterling has strengthened to its best level for Dollar buyers in ten weeks as broad-based weakness in the Dollar extends, but the move is starting to look overextended according to one analyst we follow.

The Dollar has come under pressure through November as a "narrative set in that the Federal Reserve is likely done hiking interest rates and may even begin cutting rates as early as the spring," according to Shane Strowmatt, an analyst at LGT Bank in Switzerland. "Yields on 10-year U.S. Treasuries fell below the 4.4% mark while the dollar was hovering around 2-month lows versus other major currencies."

The Pound to Dollar exchange rate rose to 1.2540 on Tuesday, a level not seen since September 11.

The selloff in the Dollar is the engine propelling Pound-Dollar strength, and the outlook for the pair remains dependent on expectations regarding U.S. Federal Reserve policy, U.S. economic performance and positioning.

Boris Kovacevic, Global Macro Strategist at Convera, says three developments have been responsible for the U.S. dollar weakening and global stocks pushing higher in recent weeks.

1. G3 central banks decided not to raise interest rates at their last meetings.
2. Signs are emerging that the U.S. labour market is cooling.
3. U.S., Eurozone and UK inflation surprising to the downside in October.

"Last week's economic data continued adding fuel to investors’ speculations that the cooling of the U.S. economy will stop the Federal Reserve from raising interest rates," says Covacevic.

The market will remain on the lookout for signs that the U.S. economy continues to slow, which can underscore the Dollar selloff.

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However, any upside surprises in future economic releases could boost expectations for Fed rate cuts challenged, boosting U.S. yields and the Dollar.

Yet this is a quiet week for the U.S. with no major data releases and the U.S. Thanksgiving holiday cutting the week short, meaning there is limited opportunity for a narrative switch back in favour of the Dollar.

This hints that further GBPUSD upside is possible in the near term.

"Today’s eco calendar is extremely thin, with Minutes of the previous Fed meeting and ECB comments the sole highlights. They aren't expected to change the underlying market drift," says Mathias Van der Jeugt, an analyst at KBC Bank.

But Mark Haefele, a strategist at UBS, says the "U.S. dollar sell-off looks overdone."

"Further significant US dollar weakening would require a sharp narrowing in the economic growth and interest rate gap between the US and the rest of the world, in our view. We don’t see this happening imminently, so we think the USD market reaction may be overdone," he explains.