Pound sterling is forecast lower on the basis that the three pillars of currency analysis have converged to give one unanimous signal: Sell.
Westpac’s High Conviction Trades model has confirmed the GBP to USD exchange rate is at risk of notable downside going forward.
The model takes into account the three main areas of currency analysis at the bank - technical, quantitative, and macro-economic analysis.
The aim is to underscore Westpac’s highest conviction ideas to generate trading positions.
At present the clearest signal pertains to the GBP/USD exchange rate which is tipped to head lower.
“GBP still looks expensive even after the +2% pullback from the highs. Further downside more likely than not as the referendum on EU membership approaches,” says Westpac’s Rob Rennie.
"A weaker suite of April PMIs (construction, manufacturing and services) along with softer BRC sales and Halifax house price data suggest growth momentum is waning into Q2, adding an additional cautionary layer to GBP.”
Breaking it Down
Westpac offer the following summary of their models on the two currencies in question:
- Pound sterling
Macro: GBP still looks expensive even after the +2% pullback from the highs. Further downside more likely than not as the referendum on EU membership approaches.
A weaker suite of April PMIs (construction, manufacturing and services) along with softer BRC sales and Halifax house price data suggest growth momentum is waning into Q2, adding an additional cautionary layer to GBP.
1) Sell GBP to USD Pair ahead of Bank of England meeting say ING
2) As Sentiment Wanes Expect Pound Sterling to Suffer
Technical: GBP looks set to continue to slide. Some support around 1.4350 but should get though these levels.
Model: GBP remains out of favour for another week (-12.9%). Brexit is the least of the model's concerns, the model short GBP thanks to the outsized current account deficit and a negative yield signal.
- US Dollar
Macro: News and data flow next week could well provide the USD with some fresh legs, April headline CPI for example likely to print as high as +0.4/0.5%, the biggest monthly increase in some years thanks to higher gasoline prices, while the FOMC minutes for their late April meeting, while unlikely to have a strong hawkish overtone, will nevertheless signal that most members remain at least open minded toward the June option, that external risks have dissipated and that Q1 growth weakness is mostly transitory.
The Fed is ultimately likely to stand pat in Jun but OIS odds of zero are surely too low.
Technical: DXY bounce off 92 to continue. Initial target 95.
Model: The model wants to build on its recent bearish bias toward USD, increasing its short to -10.7% for the week ahead. Interestingly our slow moving "long term" signal, a blend of PPP valuation, terms of trade valuation and long term spot momentum accounts for about half the total bearish signal.
Trading the Outcome
Westpac remain short GBP, from 1.4710, exit shifted down to 1.4605.
Lloyds Confirm they too Are Poised for Downside
Adding to the GBP/USD sell theme is Robin Wilkins at Lloyds Commercial Banking who says the recent consolidation over the 1.4375/65 support region looks to be a classic “flag” type process and keeps us biased to the downside.
"We target a move back towards the 1.4150 channel support region, with intra-day resistance lying at 1.4465 and then 1.4525/30," says Wilkins.
Medium-term, Lloyds still believe the market should remain in a range around 1.42, with 1.4050/1.3980 support ahead of the 1.35 key lows and 1.48-1.4950 the main resistance levels above this week’s spike highs.
"A move up through 1.50 is needed to confirm the 30-year support in the 1.40-1.35 has again held and a gradual move back towards 1.60/1.65 will be seen in the long-term," says Wilkins.