Citi Strategists: Pound-to-Dollar Rate Going sub-1.40 Again

- Sell GBP/USD at around 1.4345 level say strategists

- Seasonality currently supporting Sterling, this should fade

- But Citi's economists see Pound well supported on valuations

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"April seasonality is currently supporting GBP," says an analysis from the Citi strategy desk issued on April 4; the Pound has risen against the Dollar for the past 14 years with a combination of the end/start of the UK tax year and a heavy month of dividend payments by UK corporates being factors attributed to this seasonality.

"GBP/USD remains in the upper 1.4000s ... possibly supported by April seasonality that has tended to strengthen cable during the month over the last 15 years (with the exception of 2004)," say Citi, who remain the world's single largest foreign exchange dealer. "But slowing underlying fundamentals and Brexit risks may cap gains."

As a result, strategists have confirmed they are looking to sell the Pound on any sizeable rallies as investors should be wary that when this seasonal peculiarity fades Sterling will be left exposed.

"The fundamental backdrop in the UK continues to point to slowing momentum," say analysts, pointing to the April release of manufacturing PMI data for March which showed that while expectations were beaten (55.1 vs 54.7 consensus expectations), the February print is revised a tad lower to 55.0 from 55.2.

IHS Markit (who compile the survey), point to the average rates of increase over the opening quarter down noticeably from the growth spurt seen at the end of 2017.

The manufacturing PMI was followed by a desperately poor construction PMI which confirmed the sector slipped into contraction in March; yes bad weather was the primary driver for the disappointment but the trend in the sector remains soft.

Brexit also remains a worry for strategists who cite a report in the Times which issued a Brexit warning on UK bank jobs, reporting that “British banks operating in Europe have been warned by EU regulators that they cannot rely on a transition deal with the bloc and must implement their hard Brexit contingency plans.”

"In a stark break with advice from UK financial regulators, the ECB has instructed companies to prepare for “a no-deal scenario leading to a hard Brexit with no transition,” say Citi.

Sell the Pound at the Top of the Range

The fundamentals are therefore such that Sterling can't expect to break fresh ground against the Dollar.

Strategists confirm they remain bearish on GBP when it reaches the 1.4345 level against the Dollar, and when it does they look to sell in anticipation of a decline back to 1.3712.

But, once back at 1.3712, they see the Pound as a buy on the viewpoint that this is a cheap valuation.

"GBP remains an extremely cheap currency according to its real effective exchange rate. Furthermore, capital flows in the form of net FDI and a more hawkish BoE have both been supportive of the currency," say economists at Citi, in a separate briefing.

Citi's official forecasts - which are different to the views held on the strategy desk - are for the Pound-to-Dollar exchange rate to trade at 1.42 in 0-3 month timeframe and 1.45 in the six to twelve month timeframe.

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