GBP/USD Rate: Analyst Eyes Target at $1.30

The US Dollar was the worst-performing G10 currency for the week ending April 14 thanks to clear signs that the US administration would prefer the currency to be cheaper than it currently is.

The US Dollar index - which is a measure of broader Dollar performance against a basket of currencies - endured its largest daily drop since mid-March on April 12 after US President Donald Trump said in an interview he wants a weaker currency.

The move gives rise to hopes for Pound Sterling bulls that further gains can now be achieved.

One major reason for a renewed sense of believe the Pound to Dollar exchange rate can go higher is that it now resides above its 200-day moving average.

This means the price is above the average level of the past 200 days - this is significant as the exchange rate has not been above the 200 day moving average since June 2016 - in the run up to the EU referendum.

GBP/USD must however close above here today for us to confirm the break.

"The Pound obviously relished Trump’s comments, climbing another half a percent in what has already been a very strong week for the currency. That leaves cable a smidge below 1.255, and only one final push away from the month highs it saw at the end of March," says Connor Campbell at Spreadex.

Analyst Robin Wilkins at Lloyds Bank tells his commercial clients that should further key levels be broken the road to 1.30 could be taken:

"After holding 1.2350-1.2300 support earlier in the week, GBP has benefitted from general USD weakness overnight. We are now again approaching important resistance in the 1.2600-1.2625 region. A move up through here will put more pressure on the short positions highlighted in the CFTC reports, and risk a further squeeze towards 1.2800-1.3000."

Why is the US Dollar Suffering?

As mentioned, a fresh decline in the Dollar appears to be behind the GBP/USD’s recent jump.

In an interview with the Wall Street Journal, he said the Dollar is getting too strong because "people have confidence in me."

“The market latched onto these words but we think his comment about U.S. rates and China's currency manipulation are far more important. He removed uncertainty by confirming that the Treasury would not be labelling China a currency manipulator in their upcoming report because it would hurt talks on North Korea but he also indicated that he likes a low interest rate policy,” says Kathy Lien at BK Asset Management.  

Lien believes that Trump’s words are significant for future US Federal Reserve policy which is the ultimate guarantor of the US Dollar's value.

The Treasury is "very close" to filling the open seats at the Federal Reserve according to Treasury Secretary Steve Mnuchin.

"Chances are he'll be nominating doves, which is the only legitimate reason for the Dollar's low volatility decline," says Lien.

A 'dove' is a description applied to a central banker that errs on the side of caution and tends to show a bias for maintaining lower interest rates for longer. 

Such a person would therefore fit with Trump's views on interest rates.

"While we've seen attempts from the President to talk down the dollar before, the reference to interest rates makes this jawboning with a hypothetically credible action point," says analyst Viraj Patel with ING Bank N.V. in London.

Will these losses in the Dollar last?

Lien believes weakness should be short-lived and the upcoming Easter holidays could encourage profit-taking on short Dollar positions.

"For now, the dollar’s woes remain compounded by rising geopolitical tensions (North Korea) – although in the absence of any escalation, we would expect the $ to pare some of its post-Trump loses (DXY above 100)," says ING's Patel.

"A Serious Blow to US Dollar Bulls"

For two decades, the US has pursued a ‘Strong Dollar’ economic policy which states that a strong USD is in the interests of the US and the rest of the world.

Markets have been confused about the current administration’s US dollar policy for some time now.

"Today’s comments confirm what we already suspected - that Trump is taking aim at trade deficits. A strong USD is incongruent with that goal which means that markets can no longer rely on this administration’s support of the ‘Strong Dollar’ policy," says Rai Bipan, an analyst with CIBC Capital Markets in a note to clients.

Additionally, Trump’s prior statement that health care reform should come before tax reform is important.

"The implicit takeaway here is that tax reform will be delayed further beyond August and towards the end of the year (if that) – a serious blow to USD bulls in the near-term," says Bipan.

Recall that much of the Dollar's recent strength has been built on the assumption that Trump would introduce notable pro-business tax changes.

Any delay here could see the Dollar's gains unwind further.