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Pound-to-Dollar Rate a "Buy on Dips" say Maybank Strategists

- Buy any Sterling weakness as rate rises to support Pound say Maybank.

- Strong labour market and Brexit progress also reasons for cheer.

- But technical strategists are eyeing the potential for GBP/USD weakness.

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Pound Sterling is likely to continue its climb against the US Dollar according to strategists at Maybank who suggest clients buy the GBP/USD pair "on dips". 

The call comes after Pound Sterling entered the new week on the front foot against both the Dollar and Euro, arresting last week's decline against the greenback while furthering its advance against the common currency, which has seen the British currency threaten a renewed run at 2018 highs.

At the time of writing the exchange rate is quoted at 1.4178, having been as low as 1.4078 earlier in the week.

A tightening UK labour market, characterised by falling unemployment and rising wages, is one of the fundamental reasons why some strategists see Pound enjoying continued support over the coming months as the Bank of England is likely to view this as a greenlight to push ahead with more interest rate rises.

There are other factors that could buoy the British currency too. 

"We broadly maintain our “more optimistic” outlook than street consensus for GBP on the back of our expectation for orderly Brexit (boost to sentiment), continued improvement in labor market and potentially greater tolerance for GBP appreciation and rising market expectation for BoE rate increase to come earlier than expected," says Saktiandi Supaat, a foreign exchange strategist at Maybank in Singapore, one of Malaysia's largest lenders. 

Brexit has fallen by the wayside as a driver of Sterling during recent weeks, ever since the so called transition deal between the UK and EU was agreed at the March 22 European Council summit, which has effectively kicked the Brexit "cliff edge" into the long grass by another 21 months.

However, even those who hold an optimistic view on the outcome of current talks, which are expected to conclude with an agreement on the future trading relationship in October 2018, are mindful that the ebb and flow of negotiations could yet encourage renewed weakness in Pound Sterling exchang rates. 

"That said we do not expect a one way trade and still see a great deal of variability on GBP, driven by headlines on Brexit progress (which can be improvement or deterioration)," Supaat concedes. 

Pound Sterling was quoted 0.25% higher at 1.4168 against the US Dollar Tuesday while the Pound-to-Euro rate was 0.20% higher at 1.14940.

Above: Pound-to-Dollar rate shown at daily intervals.

Tuesday's price action follows even larger gains for the British currency during the opening session of the week, Monday, when the Pound rose by 60 points over its US rival, coming up from the 1.4080 level.

Supaat writes Tuesday that he is biased to "buy dips" in the Pound-to-Dollar exchange rate which might result from periodic bouts of unease over the Brexit negotiations or the condition of the UK economy, in anticipation of a broader move higher during the remainder of the year.

Above: Pound-to-Dollar rate shown at weekly intervals.

"GBP/USD continues to recover ahead of the five month uptrend line at 1.3943," says Karen Jones, head of technical strategy at Commerzbank. "Further support can be seen between the February and the March lows at 1.3765/12 and also at the 1.3658 September peak. The market is sidelined, but intraday Elliott wave counts are more positive."

However, Jones is more cautious about just how much further the Pound will be able to advance against the US currency flagging the 200 week moving average, which sits at 1.4243, as a potential barrier to further gains for the pair in the short-term.

The 1.4340 point is also another key level that Sterling will need significant momentum to overcome. The entire time the exchange rate sits below these two points it will remain attractive to short-sellers and be vulnerable to losses, according to Jones. 

"Setbacks have been very well supported in 2018, with the market confined to a well defined uptrend. A break above the 2018 high at 1.4346 will confirm the next meaningful higher low at 1.3712, opening a measured move upside extension to the 1.5000 area," says Joel Kruger, head of FX strategy at LMAX Exchange. "However, the major pair may not be ready to extend the run just yet in 2018, with a recent bearish reversal ahead of the 2018 high opening the door for another round of setbacks, possibly back down towards some rising bull channel trendline support in the 1.3600s."

Commentary on the merits of buying the Pound, as well as doubts over how much further it can rise, come less than a week after strategists at Swissquote, the Swiss online bank, suggested clients should use any rise in the exchange rate to enter "sell" positions. In other words, they advocate selling the exchange rate when it rallies in anticipation of an eventual fall, citing the prospect of fresh Brexit-induced weakness later in the year. 

"Sell Sterling. Brexit pain and a cyclical downturn are weighing on the British Pound," writes Peter Rosenstreich, an analyst at Swissquote. "Markets will react to the latest proposals for a border between the Republic and Northern Ireland."

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