Supported above 1.41 with 2018 highs in sight

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– GBP / USD supported at 1.41, with 2018 high of 1.4377 in sight
– Global factors in the driver’s seat as the UK calendar calms down
– US economic data and RMB exchange rates at a glance

  • GBP / USD reference rate at publication:
  • Spot: 1.4157
  • Bank transfers (indicative guide): 1.3753-1.3850
  • Specialist rates for money transfers (for information only): 1.3916-1.4050
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The pound-to-dollar exchange rate enters the new week underpinned by support levels close to and within reach of 2018 highs, although much of the price movement over the next few days will depend on international factors such as investor appetite for the greenback and the development of renminbi exchange rates. .

The pound sterling made a third consecutive advance against the dollar last week, briefly rising above 1.42 when Office of National Statistics figures showed retail sales increased in April and after IHS Markit PMI surveys indicated that the UK manufacturing and service sectors regained momentum in May.

Meanwhile, and although the dollar broadly rose despite its skeptics on Friday night when US PMI figures surprised on the upside for May, it has also posted a much more mixed performance lately then. that the ICE Dollar index entered in the new week close to its lowest level since February 2018.

This last-minute surge took the pound-to-dollar exchange rate down to 1.4150 on Friday, from where it enters the new week supported by a group of close support levels and pointed towards further gains by a range of analysts. .

“GBP / USD is consolidating just below 1.4238 / 45, the recent high and March 2018 high. Nearby support is 1.4100 ahead of 1.4000 / 18,” says Karen Jones, responsible for technical analysis for currencies, commodities and bonds at Commerzbank.

Dollar charts

Above: Pound-dollar rate at weekly intervals with fall 2018 Fibonacci retracements and US dollar index.

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“We note the strong buy signal on the daily DMI and are ultimately looking for gains of 1.4245 to 1.4377 2018 high,” Jones adds.

Jones and the Commerzbank team are looking for the pound to advance further over the next few days and weeks, taking it to 1.4377 and its highest since January 2018.

Expectations for the pound remain optimistic, although with the UK economic calendar now falling silent, global factors should shine the spotlight over the next few days.

“As long as the soft USD environment remains in place, GBP / USD is likely to cross the multi-year high of 1.4237 very soon and head towards 1.44, in line with our forecast at 1 months, ”says Petr Krpata, Chief EMEA strategist. for exchange and interest rates at ING.

While the dollar’s trend is clearly downward, the US unit has surged broadly and repeatedly in recent weeks, often apparently in response to increases in US bond yields, while rapidly deflating as the dust settles. ‘settles in the bond market.

Any unwinding of last Friday’s dollar rebound would support the pound and other currencies at the start of the week, although bond yields and their possible response to key US economic data expected on Thursday and Friday would pose lingering risks.

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U.S. economic data released this week includes the second estimate of first-quarter GDP, data that gives insight into business investment trends, and trade balance figures for April, which are expected to show the U.S. trade deficit with the rest of the world up record last month.

The consensus estimates that the US trade deficit increased to $ 92 billion as imports into a stimulus-boosted US economy likely grew faster than exports in what would be a favorable development for other economies as well, some argue for a weaker dollar. .

However, another potential and possibly significant influence on the dollar over the next few days or weeks could be the movement of Chinese renminbi exchange rates.

“Any sign of independent strength from the Renminbi could give weight to the idea that the PBOC wants a stronger currency to insulate itself against increases in the prices of imported commodities. We believe that would be bearish for the dollar, ”said Chris Turner, Global Head of Markets and Regional. research director at ING.

China grabbed the headlines over the weekend when, among others, Vice President Liu Guoqiang of the People’s Bank of China (PBoC) said; “The People’s Bank of China has developed a managed floating exchange rate system based on market supply and demand and adjusted for a basket of currencies. This system is suitable for the arrangements of China’s exchange rate system now and for a period of time in the future. “

ING RMB correlations

Above: ING Group chart showing the correlations of different currencies with the renminbi.

Vice President Guoqiang answered questions about the bank’s stance on China’s managed exchange rate regime, questions that may have been prompted by the recent release of the transcript of an April speech by Zhou Chengjun, director of PBOC Finance Research Institute in which Chengjun said the bank must abandon the exchange rate targets in the end. ”

This is not the same subject that Lu Jinzhong, head of research at the Shanghai branch of the PBoC, broached in one of the bank’s magazines last Friday.

Jinzhong suggested that the PBoC “appropriately appreciate the RMB” via the USD / CNH exchange rate in order to compensate for rising dollar-denominated commodity prices which have increased production costs and reduced corporate margins, thereby increasing which could have broad and stimulating implications for other currencies.

Many currencies have a positive correlation with the Renminbi and some of them have been growing over the last few months as shown in the chart above, which among other things means that at least some of them could emulate any rally seen in major Chinese currencies. exchange rate.

It is not clear whether the PBoC would accept the proposal, although any decision to do so would inevitably imply large gains for the renminbi against the dollar and therefore potentially pose an upside risk to the pound, euro and all. other currencies that tend to follow. the Renminbi.

“Let’s see if the USD / CNY can drop below the 6.40 / 41 area in the next few weeks (we are generally doing like a weak dollar environment this summer) and in general the major trends in USD / Asia – especially in USD / CNY – Trend to support the general trend of the US dollar, ”says ING Turner.

EUR CNH USD and GBP

Above: GBP / USD next to CNH / USD (green), EUR / USD (blue), and USD / CNH (red).

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