Having hit fresh highs against a basket of currencies in recent times, expectations suggest the US currency is in for a period of cooling.
While the trend is still higher for the buck, recent moves higher have left the currency looking overbought.
Indeed, speculative positioning on the USD remains extended by historical standards. Latest IMM data showed that speculative accounts continued to add to aggregate USD long positioning in the week through January 13th.
"The overall implied USD long position amassed versus the major currencies totaled USD49.0bn in the past week—the largest ever by our reckoning—which represents a net increase of USD2.5bn over the prior week and a USD12bn bump from the mid-December total," note TD Securities in a note on the matter.
Thus, with such strong positioning the market may struggle to find yet more dollar-buyers. As such corrections lower can be expected.
At the time of writing we see the following levels:
- The pound to dollar exchange rate (GBP/USD) is 0.06 pct higher at 1.5122.
- The euro to dollar exchange rate (EUR/USD) is 0.25 pct lower on a day-by-day comparison having reached 1.1580.
"Sterling tracked the euro again, dropping from GBP/USD 1.52 to 1.50, but subsequently managed to return into the GBP/USD 1.51 area. The 1.50 mark represents a rather strong support, at risk of being breached in the present phase in case of a sharp drop of the EUR/USD. However, if conditions remain in place for an initial BoE hike this year, the movement will prove only temporary," says Asmara Jamaleh at Intesa Sanpaolo.
There are some data points to watch out for in the week ahead when it comes to sterling direction.
Some light could be shed on whether the BoE can “afford” to start increasing interest rates in the course of this year by the BoE minutes, due to be published on Wednesday, as well as by labour market data (out on the same date) and the retail sales survey (Friday).
"This week will also bring several BoE speeches: Cunliffe tomorrow, Miles and Fisher on Thursday. We continue to forecast a further appreciation of the pound against the euro," says Jamaleh.
The Outlook for the USD
On Friday, US inflation data were broadly in line with expectations: the decline of the core component, stronger than estimated by one tenth of a percentage point, was offset by the smaller drop of the headline index, by an equal amount.
"The dollar has appreciated further, hitting new highs, also supported by confidence data (Michigan index), which improved in January much more than expected. Market rates and yields have increased slightly.
This week, input from the United States will be limited.
"The most important will be tomorrow’s housing sector data. On the whole, the dollar should consolidate. Support should also come from the potential weakening of the euro on the expected announcement of a QE programme by the ECB on Thursday," says Jamaleh.
Ahead of next week’s FOMC meeting (on Wednesday, 28 January), recent economic data releases failed to provide especially clear indications on whether it would be appropriate or not to postponed the timing of the initial fed funds rate hike.
The next round of releases should be of more help.