GBP/USD Rate In Mid-week Setback

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The Pound to Dollar exchange rate has retreated in the midweek session from 1.2687 to 1.2655, raising the prospect that a six-day uninterrupted advance could be ending, although some say some further modest gains are still possible.

Dollar weakness has been the feature of the past two weeks and was well anticipated in our Week Ahead forecasts, but we could now be at a point where this USD selloff has reached its limits.

We note that the daily Pound-Dollar chart showed some growing uncertainty, with Friday, Monday and Tuesday printing 'spinning top' candle stick patterns. These patterns simply suggest the market looks increasingly unsure of itself.

Above: GBP/USD at daily intervals. Track GBP/USD with your own custom rate alerts. Set Up Here

Tuesday's spinning top was particularly notable and the near-term rally has duly given way to some weakness at the time of writing.

To be sure, we can't say the rally is over just yet, and some analysts are looking for the advance to extend over the coming days.

"GBP/USD has registered higher closes in the last five straight sessions. After closing above the 50Day MAV yesterday, the early February high at 1.2772 remains in focus," says Jeremy Stretch, an analyst at CIBC Capital Markets.

Keep in mind that February month-end flows are likely to result in a weaker Dollar; we reported that Crédit Agricole's assessment of potential month-end currency market flows suggests USD selling is on the cards.

According to analysts at Crédit Agricole, the positive performance of U.S. stock markets in February suggests moderate USD selling at month-end.

"Global equity markets were broadly firmer in February. In FX, the USD was broadly firmer on the month. Overall, the moves in equity markets, when adjusted for market capitalisation and FX performance this month, suggest month-end portfolio-rebalancing flows are likely to be moderate USD selling across the board with the strongest sell signal in the case of the USD vs CAD and AUD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole CIB.

Most FX analysts we follow maintain a view that the Dollar will remain preferred as long as the U.S. economy continues to outperform expectations and gives reason for the Federal Reserve to avoid cutting interest rates.

"The sliding dollar trend might not gain much traction given the ongoing US economic exceptionalism and US yields hovering near 3-month highs. Key upcoming event risks could potentially fuel another leg up, particularly if the Federal Reserve’s (Fed) preferred measure of inflation beats expectations," says George Vessey, Lead FX Strategist at Convera. "The US dollar index (DXY) has found some decent support around its 200-day moving average, currently located at 1.03.73 and is trading back above the 104 mark today."

Above: The Dollar index, a measure of broader USD performance, at daily intervals.

Paul Spirgel, a Reuters market analyst, says the rethink in lower Fed rate expectations has seeped into the prevailing Bank of England narrative, which could lead to a continued grind by Pound-Dollar through familiar territory until data emerges to challenge current policy views.

Bank of England Deputy Governor Dave Ramsden echoed Fed officials' recent statements on Tuesday, saying inflation pressures remained persistent, which precludes a pivot to lower rates.

"Under current UK and U.S. inflation conditions, it is likely GBP/USD will remain moored within its 2024 range spanning 1.2788-1.2518 as central bank guidance awaits further data on the evolution of wages and prices before shifting to lower rates," says Spirgel.

In fact, analysis of volatility data shows implied volatility in Pound-Dollar is near a thirty-year low!

We look forward to Wednesday's U.S. Q4 GDP estimate and Thursday's core PCE index, which Spirgel says may fleetingly hold sway over GBP/USD should the data hint that the U.S. inflation remains persistent.