UK election the focus for Sterling

US Dollar Research Report

• Disappointing US data weighs on the dollar
• UK election the focus for Sterling

Sterling Dollar GBPUSD FX Technical Analysis

The Sterling dollar exchange rate has bounced aggressively since the low of 1.4600 seen earlier in the month and now stands almost 6% higher at just above 1.5400. The primary driver behind the current move has been a shift in sentiment with regard to the timing of any interest rate rise from the Federal Reserve. At the beginning of the month most analysts had expected a move from current emergency levels at soon as June however after the recent bout of weaker US data with Non-farms underwhelming and first quarter growth figures disappointing at only 0.2% investors are a little nervous and there has been a scramble to cover the crowded long dollar position.

The Federal Reserve have consistently maintained that any move in rates would be data dependent so I understand why markets have reacted this way initially , however I feel that it may be a little overdone and the market may have become overly pessimistic. Q1 GDP was disappointing but there were some temporary factors in the background that would have been a drag on the economy. The port slowdown has now ended and it looks likely that the energy slowdown is behind us. Q1 figures have been unusually disappointing over the last couple of years and perhaps the seasonal aspect of the data may see it revised upwards at a later date.

Second quarter data is beginning to be released and tomorrows ISM will be a decent bellwether and next weeks delayed Non-Farm payrolls figure will be very closely watched indeed. If it disappoints again and last month's figure is confirmed as accurate the current weakness may well accelerate.

In the UK data has been overshadowed by the general election with the country going to the polls on 7th May. Sterling has remained under pressure as no-one is sure what the political landscape will be once the votes have been counted. Weaker GDP and benign inflation have been discounted as the country decides on who will govern us for the next 5 years. A hung parliament has generally been seen as a bad thing for confidence and for Sterling as the ambiguity could result in businesses delaying important investment decisions however there has been a recent about turn as hedge funds bet on a rise in the Pound after the election thinking that the recent move is overdone. The wait will be over in a weeks' time until then the economic fundamentals will take a back seat and the direction of the Pound will be dictated by events outside of the UK.

For USD Buyers

The rebound has been quick and aggressive and we are now incredibly overbought on the momentum indicators. I would suggest buying dollars here or as close to 1.5500 as you can. That level was incredibly tough to break on the way down and should provide us with a decent level of resistance. A break above here would signal a swift move up to 1.5800.

For USD Sellers

Hopefully you managed to secure a rate below 1.5000 however if you missed it last time I would encourage you to leave a stop loss above 1.5550 hoping for a move back below 1.5000 and a test of the lows of 1.4600.