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GBP/USD is under pressure, but near-term increasingly oversold.
The pair has fallen to 1.3205 in midweek trade, the lowest level since August 01, amidst a broader pound sterling selloff linked to falling UK bond yields and expectations for a significant fiscal tightening.
The pound is under the hammer amidst warnings the UK government will have to consolidate finances to the tune of at least £30BN, largely through tax increases.
This should 1) slow the economy (not good for the pound) and 2) help limit inflation (good for consumers and helpful for the Bank of England).
This theoretically creates more leeway for the Bank of England to cut interest rates and is why UK bond yields are falling (a traditional headwind for sterling).
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Above: GBP/USD daily, with RSI in lower panel and nine-day EMA evident in top panel. Stay on top of the market by setting a rate alert.
"Sterling sank by almost a full percentage point on the dollar at one stage yesterday amid reports that the OBR is poised to slash Britain's productivity forecast by a larger-than-expected 0.3%, which in itself would effectively open up an additional £20 billion hole in the public finances," explains Mathew Ryan, Head of Market Strategy at Ebury.
"Pressure on Chancellor Reeves is immense heading into the budget, as she will somehow need to find a way to close the fiscal gap, while assuring markets that her strategy stands a realistic shot of boosting UK growth. No easy task to say the least," he adds.
Above: Donald Trump heads for South Korea where he will meet Xi Jinping. Official White House Photo by Daniel Torok.
At the same time, the dollar is well supported on clear evidence that the U.S. and China will agree a new trade accord later this week following a much anticipated Xi-Trump meeting.
The U.S. is "going to have a good deal" with China, Trump says ahead of the meeting; the market's assessment is that this will be good for U.S. growth, which is also good for the dollar.
Also note that Wednesday's slated Federal Reserve rate cut is also no headwind for the dollar, as it has long been factored in. Markets also expect Fed Chair Jerome Powell to keep guidance to a minimum owing to a lack of official economic data.
In short, the Fed is unlikely to spoil the dollar's party.
This combination of factors pressures pound-to-dollar below 1.33 and a run on 1.32 is next.
This selloff leaves the pound looking undervalued, as the consensus of investment bank forecasters shows an expectation for a recovery in the pound-dollar on a three-month timeframe.
The consensus mean and median forecasts show the pound is now undervalued, and this could bolster any argument that there are limits to GBP/USD weakness.
Pound Oversold Short-term
We are also seeing some oversold conditions emerge on the daily charts (see chart above), which advocates for some let-up in selling pressure.
With the RSI approaching 30 on the daily chart, we receive a clear signal that some relief must be on offer.
The pair has diverged notably from the nine-day exponential moving average, which also augurs some consolidation.
Note that oversold conditions can be overcome by an exchange rate simply moving sideways, and this does not necessarily signal an outright recovery.
So, we're looking oversold here, but it's too soon to call any meaningful recovery, which we suspect will have to wait for the passing of next month's budget.