The Pound-to-Dollar exchange rate was recovering off two-month lows ahead of the weekend. Still, it could be likely to extend this move further over the coming days as international markets stabilize, and the U.S. Dollar becomes more selective in its appreciation.
UK Pound Sees Rebound
Sterling was on the rebound Friday amid an evident improvement in investor sentiment although it lagged higher-yielding commodity currencies like the Australian, Canadian and New Zealand Dollars, which also recovered following a bout of widespread weakness for risk assets and currencies.
Meanwhile, U.S. Dollars were sold more selectively, and commodities and other risk assets were bought on Friday following a volatile period that saw investors responding to both a deterioration of the short-term economic outlook in Europeans improved prospects for the U.S. economy.
The Pound-to-Dollar exchange rate was a fraction higher on Friday but lower for the week, while Sterling gained on low-yielders like the Euro for both periods in a pattern of price action that could be likely to endure through the coming days.
“GBP was undermined at the start of this week by the deterioration in risk sentiment which hit other high beta G10 currencies,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. “The recent correction lower for the GBP though does not reflect a material deterioration in positive fundamental drivers that have helped it to outperform so far this year alongside the CAD and USD.”
Disruption to vaccine exports from India was widely cited for Sterling’s losses, which came alongside steep falls in EUR/USD and new or prolonged ‘lockdown’ for several major European economies including Germany.
This and the brightening outlook in the U.S. has gotten a once-bearish market rooting for the Dollar to outperform further and helped drag GBP/USD below 1.40, although it found strong support coming from a Fibonacci retracement around 1.3672 which may limit any further losses this week.
“Sizable fiscal stimulus, the likelihood that the drag from COVID will fade significantly, and a massive pile of “excess” savings available to support consumption makes us extremely optimistic about growth in 2021 and 2022,” says Kevin Cummins, chief U.S. economist at Natwest Markets. “The upcoming week’s economic calendar features the regular start-of-the-month package of the manufacturing ISM and the employment report, along with auto sales and a handful of other indicators. We expect data to have a generally strong tone, due in part to the fading impacts of harsh weather.”
Washington’s ramped-up vaccination program has seen the U.S. begin to rival the UK regarding the percentage of the population receiving a shot each day. Although the ink is barely dry on legislation authorizing President Joe Biden’s $1.9 trillion fiscal support package, the White House is already reported to be drafting an even larger infrastructure-focused bill. This could bolster investor and economists’ expectations for U.S. growth, which have already risen notably late and lifted the Dollar.
“With greater clarity on the Fed’s reaction function, the main risk to our bearish Dollar outlook now relates to non-US growth. Significant downside surprises to either Euro Area or Chinese growth could warrant upward revisions to our forecasts for USD crosses. At the same time, increased confidence in our upbeat European growth forecasts (e.g., due to accelerating vaccine distribution) would be reason to lean in to Dollar shorts,” says Zach Pandl, global co-head of FX strategy at Goldman Sachs.