Sterling "Biased Higher" vs. US Dollar, Kudlow Appointment Being Digested by Markets

- Kudlow's appointment unlikely to benefit Dollar
- "Bias remains for upside play" says one strategist on GBP/USD
- Next greenlight to dump the USD seen at next week's Fed meet

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Markets remain in choppy ranges, with mild disappointment in US economic data continuing yesterday as retail sales data came in a little softer than expected.

Market focus over the past 24 hours has been on the appointment of Larry Kudlow as the White House economic adviser, he replaces Gary Cohn as National Economic Council director.

The announcement was interesting in that Kudlow is not necessarily an enthusiast for Donald Trump's protectionist trade policy agenda, having expressed disappointment with the moves.

However, media reports suggest he has appeared to warm to at least some targeted trade actions and some analysts are perceiving Kudlow as in fact being a full on advocate for Trump's stance. A currency note from ING Bank see Kudlow "as standing behind the current administration’s tough stance on tariffs" and having "hinted at phase two of tax cuts (making them permanent)."

"Both are in our view USD negative," reads a briefing from the ING strategy team.

Analyst Saktiandi Supaat with Maybank in Singapore reckons recent developments - Kudlow included - play towards an upside bias on the Pound-to-Dollar exchange rate.

"Bias remains for upside play," says Supaat on the GBP/USD outlook, noting that "there were also random remarks (akin to trade ideas) made by coming White House Chief Economic Advisor Larry Ludlow – 'I would buy King dollar and sell gold'. As of writing, USD price action somewhat shrugged off his comments and remained soft."

But there are Sterling-specific reasons for backing GBP/USD gains too suggests Supaat citing recent positive developments which include an optimistic tone on the UK's economic growth outlook and real wage growth as detailed by Chancellor Phillip Hammond in his Spring Statement.

Furthermore, on the Brexit front, Supaat sees "signs of a conciliatory tone" from the UK with the intention of pressing negotiations forward.

Recent reports from the Sun suggest the UK's Brexit Committee have agreed to open borders until 2021 instead of 2019, and they have agreed a brexit financial settlement at GBP37.1bn.

It is believed these concessions should oil progress towards the agreement of a Brexit transitional period at next week's European Council meeting; a key milestone in Brexit talks and an important danger-point for Sterling.  

Meanwhile, for the Dollar, "the next trigger for bears could come next week at the Federal Reserve's March meeting, helmed by the new Chairman Jerome Powell. With wages and inflation still subdued, Fed is likely to keep the dots plot unchanged. That could give market players the greenlight to dump the USD," says Supaat.

The Dollar index - a broad measure of the Dollar's value against a basket of currencies - has logged four consecutive days of decline, and "upside appears limited for the Dollar ahead of the Fed next week after U.S. retail sales declined for a third straight month," says Joe Manimbo, an analyst with Western Union's commercial services unit.

Despite the Dollar's apparently dreary near-term prospects, Robin Wilkin, an analyst with Lloyds Bank Commercial Banking says the GBP/USD exchange rate ultimately remains "trapped between support in the 1.3920/00 region and 1.4000 resistance" on an intra-day basis.

Wilkin argues a push through resistance would add some conviction of a stronger move towards more important resistance in the 1.41-1.42 region, while a slide through the 1.3920/00 region opens a move back towards the recent 1.3715 lows.

But, and there's always a but, "our studies suggest a broader correction should be seen, after peaking around 1.4350, which has potential for a move back to the 1.3650-1.3450 region," says the analyst.

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