Image © Adobe Images
The Pound to Dollar exchange rate climbed to new six-month highs to open the new week and could be set to rise further, although there is now a significant technical resistance level looming almost immediately overhead of the market, which could temper the rally somewhat in the days ahead.
GBP/USD rose to almost 1.33 last week and then climbed further near to 1.34 in the Asia session overnight on Monday when it appeared on course for a 10th day of appreciation or recovery, bringing it within reach of 1.3427 and the 78.6% Fibonacci retracement of the June 2021 to September 2022 downtrend.
Temperance here could slow the rally somewhat, however, with the Dollar remaining on the back foot and fundamentals continuing to lean against the currency, any corrective setbacks for Sterling might be shallow and short-lived, with the nearest support levels found around 1.3233 and 1.3134 thereafter.
“We flipped our Dollar view a few weeks ago, based in large part on tariffs and other US policy shifts raising uncertainty and impairing sentiment in the US and likely weighing on US firms’ profits and US households’ real income,” says Kamakshya Trivedi, head of global FX strategy, at Goldman Sachs, in a Thursday commentary.
Above: GBP/USD at daily intervals with Fibonacci retracements and selected moving averages highlighting possible areas of support. Click for closer inspection.
“The thesis for further upside in [GBP/USD] remains intact, with Sterling benefiting from the broader strength in the European FX complex we expect this year, as well as from the lower vulnerability of the UK economy to the US tariff shock. In light of the domestic risks though, we do not see a compelling case for positioning for sustained Sterling upside versus other European currencies for [now],” he adds.
The White House campaign against Federal Reserve Chairman Jerome Powell, its tariff policy, the imperial optics around its trade dispute with China and the evolving response from Beijing all imply that any stabilisation of the Dollar might also be somewhat short-lived this week.
The greenback has come under broad pressure alongside US equity markets since the eruption of the trade conflict between Washington and Beijing, which has also placed the quasi-pegged Renminbi under strain, leading the ICE Dollar Index to its largest loss since November 2022 over the week heading into Passover.
“John Authers at Bloomberg just ran a piece titled ‘This Passover, Everyone Has Questions’. His annual tradition of asking four questions, as in that ancient ceremony, didn’t start with the obvious one: “Why is this market different from all other markets?” But when the 30-year Japanese bond can fall 11bps on the day, most traditional takes on what is going on look, well, ‘unleavened,’” says Michael Every, a global strategist at Rabobank, in market commentary last Wednesday.
Above: GBP/USD at weekly intervals with Fibonacci retracements highlighting possible areas of technical resistance. Click for closer inspection.
“To the answer: this market is different from all other markets because in all other markets we assume there is one global economy within which all goods, services, and capital flow, with one single global reserve currency, the US dollar. Now, we might be witnessing an Exodus from it,” he adds.
The Dollar decline through Holy Week has evoked use of Exodus as a metaphor for what appears to be happening with the currency. This describes the escape of some early Israelites from Egypt, in the Old Testament book of the same name, a story in which Moses receives commandments and a covenant while sojourning on a mountain, only for the latter to later be broken, leading to the events described in the Book of Jeremiah where it says "the people of both Israel and Judah have done evil and aroused my anger by burning incense to Baal," among other things. The Exodus story can be found in Chapters 12:20, and the covenant in Chapters 20:23.
Economists at TS Lombard have a different way of explaining the market rout, however, seeing instead a destruction of capital brought about through the impact they expect White House trade and tariff policy to have on the so-called supply capacity of the US economy and this might not be entirely an academic mythology.
This is because the tariffs will reduce the supply, or otherwise raise the cost, of necessary and desired things in the US for a time at least, which matters because demand and supply are akin to the debit and the credit of a transaction, the liability and the equity around an asset and perhaps also, the yang and ying, all of which make up alternate sides of what is effectively the same coin in each instance.