The Pound Storms Back Above 1.41 vs. the Dollar, Can Sterling Record Fifth Consecutive Day of Gains?

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The Pound-to-Dollar exchange rate's advance is now seen entering its fifth successive day and could extend as the Dollar's woes appear to be entrenched.

Pound Sterling is looking to end the week on a positive note against the US Dollar on the back of a combination of improved sentiment and universal Dollar weaknesss.

"We stay in favour of buying GBP dips. Even though Brexit related uncertainty remains intact, more supported central bank rate expectations should prove the GBP’s predominant driver," says analysts Manuel Oliveri with Crédit Agricole in London.

For Sterling, Brexit-related risks remain a key concern and we will watch for further developments on this front as

Sterling's rally above 1.41 is however largely the result of an ongoing deterioration in sentiment towards the US Dollar which remains embroiled in a long-term decline.

"Sterling has also joined the bandwagon of G10 majors recovering against the US dollar on the back of
diminishing risk aversion," says Roberto Mialich, FX Strategist with UniCredit Bank in Milan. "Admittedly, this is far from surprising, as GBP/USD has proved so far – and we think it will continue to be in the future – largely a USD story that is expected to prevail over other main drivers such as new UK data releases and monetary policy expectations."

The Dollar has been in decline since the start of 2017 and the trend lower appears increasingly entrenched with various narratives explaining the decline at various points.

The latest narrative appears to be a concern that the US economy has reached peak growth and could start slowing, which could in turn diminish the prospect of yet higher interest rates at the Federal Reserve in the future.

"The reaction of the USD and US equities to rising US inflation pressures suggest market participants are not convinced the Federal Reserve will quicken the pace of its interest rate normalisation cycle. Fed funds futures continue to discount about 75bps of interest rate hikes this year. The bottom line is that the fundamental USD downtrend is intact," says Elias Haddad at CBA in Sydney.

There are growing concerns amongst traders that the US economy is now in the late stage of the cycle and economic growth will soon start slowing.

"From a longer-term perspective markets remain uninspired by the US economic prospects and the USD. Effectively markets continue trading the end of the US economic cycle where any near-term acceleration in inflation may trigger more Fed tightening but will also bring forward the next downturn," says Oliveri.

Marshall Gittler, an analyst with ACLS Global says stagflation - an environment of high inflation and low growth - is increasingly becoming a risk the US economy, and the Dollar, might soon face.

"The spectre of stagflation is haunting the markets. US industrial production was revised down sharply for December and actually fell in January, contrary to expectations, as did capacity untilisation. Meanwhile, following Wednesday’s higher-than-expected CPI data, Thursday’s PPI also beat expectations, while the prices paid indices for the two Fed indices out yesterday – Empire State and Philadelphia Fed – both jumped. So we have output stagnating or even falling, while inflation accelerates."

Gittler warns this mix can be deadly for the markets and "sell USD sentiment seems to be the order of the day."

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