Weakness could be put on hold this week, according to Swedbank, Soc Gen

– USD rally takes a break
– Allows the GBP / USD to go back above 1.37
– Jackson Hole could be a wet firecracker
– But the USD’s medium-term advance remains likely, some say

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The pound / dollar exchange rate (GBP / USD) rallied above the 1.37 region as the relentless rally in the dollar could reverse some of the gains recorded the week before.

The exchange rate recovered from an August low of 1.3602 to 1.3744 at the time of writing, with currency analysts saying the dollar may have been due to a period of consolidation before the emergence of the Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium which is due to start on Thursday.

“Technically the dollar looks toppy and a DXY correction below 93.0 could ensue if Powell remains vague on the timing and terms of the tapering,” said Kenneth Broux, senior strategist at Société Générale.

Pound to Dollar Chart

Above: GBP / USD trended lower in August, but finds support just above 1.36.

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The dollar is one of the best performing currencies of 2021, having gained against all of its peers as markets grew confident the Fed would scale back its quantitative easing program (tapering), a move that would ultimately precede a rise in prices. interest rate.

The timing of the reduction remains one of the most important topics in financial markets and will ultimately help determine how the dollar trades until the end of 2021.

Anders Eklöf, chief currency strategist at Swedbank, said he expects the dollar rally to pause this week as Jackson Hole will not provide the fuel dollar bulls need to earn further gains. .

“Powell is unlikely to present firm political details on the timing and pace of the reduction rather than elaborate on policy in general,” Eklöf said.

The consensus among analysts is that the Fed will signal a slowdown at its November meeting and begin the process in December.

However, a call in September cannot yet be ruled out, a development that would be favorable to the dynamics of the dollar.

But the Kansas City Fed announced last week it will virtually host the Jackson Hole Symposium, a timely reminder that the Delta variant of Covid-19 is pushing up case rates in the United States, which could slow the economic rebound and give the Fed pause for thought.

“Overall, the USD rally should come to a halt this week in our opinion, given the USD’s long positioning and lack of additional fuel / triggers,” Eklöf said.

Any downturn could therefore offer those looking to buy dollars a trading opportunity, especially since the general feeling remains that the US currency has the potential to advance in the medium term (coming months).

The dollar has already dominated this year and holds gains against all of its G10 peers except the Canadian dollar and the British pound, against which it holds tiny losses of half a percent.

Relative performance of the dollar

Above: performance in USD in 2021.

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“Macroeconomic developments are moving towards a ‘golden loop’ situation, favoring the USD,” said Terence Wu, FX strategist at OCBC.

“The outlook for global growth again looks weak relative to the United States due to Delta’s concerns. However, it is not enough for the Fed to reverse its hawkish bias,” Wu said.

Valentin Marinov, head of G10 FX strategy at Crédit Agricole, describes this win-win environment for the dollar as “the smile of the USD”.

“The USD has reappeared as a high-yielding safe haven currency that tends to outperform during bouts of risk aversion thanks to its superior liquidity, but which also performs well in times of risk thanks to the relative resilience of the dollar. ‘American economy,’ Marinov said. .

The safe-haven qualities of the dollar were demonstrated over the past week amid a massive sell-off in the global stock market, linked to fears that the expanding Delta variant could start the economic rebound in regions such as China. and Southeast Asia.

These fears remain relevant today, even though the stock markets have rebounded.

“The large uncertainty shock from COVID-19 has revealed the US dollar’s unparalleled safe haven status in times of crisis. Yet unlike other safe havens, the dollar also performs well in economic rebounds led by the US dollar. United States, “said Marvin Barth, head of macro FX & EM. Strategy at Barclays.

The latest IMF forecasts show that they anticipate global economic growth of 6.0% in 2021 and 4.9% in 2022, with advanced economies showing growth of 5.6% and 4.4%. But they predict that the United States will lead with growth of 7.0% and 4.9% in 2021 and 2022 respectively.

Nordea Markets claims that the US dollar tends to rise when US growth expectations rise relative to the rest of the world and vice versa:

Growth forecasts in USD

“Now that the peak of growth is behind us, investors are increasingly focusing on future economic activity, which favors the United States. If the US dollar continues to appreciate, that will be bad news for the US. risky assets like stocks and commodities, ”says Jeroen Blokland, a Portfolio Manager at Robeco.

Goldman Sachs modeling reveals that the downward revision in global growth expectations has weighed 100-250bp on G10 currencies against the dollar since late July.

“Both engines probably have to turn for the broad dollar to fall steadily,” said Zach Pandl, strategist at Goldman Sachs.

“Given the important role that global growth expectations appear to have played in the recent performance of the G10 FX, we will need to be more confident that the delta epidemics are abating before recommending further pro-cyclical short selling on the market. dollar, ”Pandl said.

The overall favorable context for the dollar therefore remains intact and any pause in the currency’s growth could therefore prove to be fleeting in nature.

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