Dollar setback comes to rescue sterling

The dollar posted its best monthly close on Thursday since May 2017. However, and almost

immediately those gains have been dented, and by the close of play in just the first trading

day of the new month yesterday.

There are a number of reasons why the dollar fell back so markedly and so immediately

after such a positive monthly close. Perhaps the most obvious of those is down to the

simple fact that the market was just so overweight long of the US currency coming into the

month end. The other immediate reason is also the looming US mid term elections where

the outcome is by no means certain.

For starters, if the outcome there throws up any kind of political impasse for the Trump

administration then that would not do the dollar any favours at all. So, perhaps it makes

sense for the markets to begin to lighten up on such overweight dollar exposure?

The other reason for the dollar falling back so sharply has much to do with rising optimism

over the past 24 hours that the US and China could soon end their ongoing trade dispute.

The caveat to that is of course that it is based on speculation at this stage and nothing yet

tangible.

However, hidden inside all of this is the role played by ‘reserve’ managers. Central banks to

you and me and what has become clear over the past few weeks is that certain of those

players have been recycling dollar reserves into other currencies as the dollar has been

rising. That has helped in particular to slow the fall in the EURUSD and ensured that it so far

has managed to remain above a key technical support level at 1.13 albeit by just 2 pips

earlier this week.

Now, yesterday that sell off in the dollar was not just confined to the EUR and was

widespread with all of G10 except Japan really benefitting from the demise in the US

currency. Indeed, the biggest gainer on the day was actually the poor old beleaguered

pound.

It was only on Wednesday that the GBPUSD was trading underneath 1.2700, but by the

close last night it was back above 1.30 again. Naturally, in relative terms the pound was the

one currency with the most to gain given its significant recent underperformance. Granted

the latest Brexit headlines over the past 48 hours have all been positive which has helped

that rebound too.

However, once again perhaps we should also look to those ‘reserve’ managers when

hunting for culprits behind this latest sterling rebound because there is more than just a

suggestion that some may have been active in this one over the past couple of days.

So, where next for the pound then? Well, it could push even higher before the week is out,

but it will need to see a continuation of a weak dollar and positive Brexit headlines to make

it past 1.3250 against the US currency I think. I’m not ruling it out, but I’m not ruling out the

potential for some EU politician to immediately throw cold water on this latest Brexit

optimism either.

This is after all a pattern that has repeated itself countless times over the past 2 years and

let’s not forget that the pound is by no means out of the woods yet and as I just said; the

next important headline could just as easily send it back down again.

From a personal perspective I find myself soon to be travelling in Europe again and have just

this minute (as I write this in fact) taken advantage of the rate versus the EUR being back

near 1.14 again.

Hardly great value you might say, but it’s close to as good as it has been for the past few

months and for that I am at least slightly grateful. Perhaps some irony here because whilst I

want to see the pound strong and a good Brexit outcome; strangely each time it bounces, I

seem to keep finding some excuse to have to sell it!

Key data events due today

02/11- 12.30pm US October Unemployment report