Pound-to-Dollar: Sterling Faces Uphill Task as November Traditionally Belongs to the Greenback
Seasonal considerations suggest the US Dollar should be a winner this November, but the Pound appears intent to put up a fight.
The US Dollar is outperforming on the day with most global currencies suffering declines in the region of 0.4% against the Greenback as seasonal drivers appear to take control of FX markets.
The Pound-to-Dollar exchange rate slipped to 1.3129 Tuesday having opened the day at 1.3174 amidst a broad-based Dollar rally.
The Dollar is the day’s best performing global currency and it is worth noting that Sterling is actually outperforming others with its 0.3% loss:
Above: One day comparitive performance of major currencies against the US Dollar confirms Sterling is one of the best in a bad bunch.
“The USD is firmer in a broadly based move that has seen is gain roughly 0.4% against all of its major currency peers. There does not appear to have been any specific trigger for the USD buying, beyond some soft data from Europe,” says Shaun Osborne at Scotiabank.
Osborne notes the USD has looked in a strong technical position against the EUR since the break under support at 1.1675, however, “we note that seasonal trends are generally USD-supportive in November”.
Above: Data shows the US Dollar typically enters year-end on a strong footing.
“Sterling’s performance on the session reflects the softness seen in the majors versus the USD generally,” says Osborne. “The turn lower in the pound from the high 1.31s suggests Cable remains at risk of a push under 1.31 following last week’s low close.”
While the chart suggests the Dollar should end the year on a decent note, Osborne is a little more wary. “However, we still view scope for sustained USD strength as limited, with the Fed more or less fully priced for the end of the year and scope for disappointment on US tax cuts remains high,” says the analyst.
"Sterling succumbed to broad-based strength in the U.S. currency. Sentiment toward the Pound remains fickle with upside capped by the Bank of England’s dovish outlook for interest rates. Still, the Pound’s ability so far to hold above key psychology support has helped put a floor underneath it," say Joe Manimbo, an analyst with Western Union.
The Dollar's recovery - and the debate over how far it can extend - is one of the trending topics amongst the FX analyst community this week.
Taking a more bullish view on USD is BNP Paribas who say positioning is not yet as stretched as it needs to be in order for the greenback’s advance to be stymied. When positioning gets 'stretched' it implies everyone in the market is engaged in the same bet - which ultimately stalls the move.
Tuesday’s call from BNP comes at the tail end of a two-month period that saw the Dollar index squash a large portion of its year-to-date loss, compressing it from -11% to around -7%.
“The very negative sentiment towards the USD during the summer has improved significantly, but BNP Paribas FX Positioning Analysis suggests the market still has room to add to long USD positions,” says Daniel Katzive, North American head of FX strategy at BNP Paribas.
Expectations of tax cuts, reforms and the prospect of higher interest rates to come during the months ahead have been the main drivers of the Dollar’s Autumn renaissance.
“While the potential for a USD short squeeze has been largely exhausted, the positioning measure highlights considerable scope for markets to build long exposure if the price and news momentum remains favourable,” Katzive adds.
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