The Société Générale note focuses on GBP but has this on the dollar:
- I’m not holding out any hope of easier Fed policy, and not much of any co-ordinated policy move to stop the dollar’s rise.
This in reference to the chatter about the place on some sort of agreement ala the 1980s Plaza agreement to drive down the value of the USD. IMO this is not gonna happen, and SG seem toa gree. Still, the chatter perists.
Anyway, back to SG and the main focus of the note:
There is both a domestic and an international aspect to sterling’s weakness.
- The international backdrop is a combination of global inflationary pressures and US economic out-performance that supports the dollar as rates rise everywhere. The energy crisis, the US’ terms of trade advantage, Europe’s vulnerability to the war in Ukraine, all add to that. US rates are rising as the market reprices peak Fed Funds higher, and equities are being repriced lower. This has all the hallmarks of the start of the final stage of the dollar’s rally (a stage which has the capacity to be violent and volatile).
- On the domestic front, the UK has a worse growth/inflation trade-off than most of its competitors, and a policy mix of fiscal profligacy and tight money, that is hurting confidence and encouraging dollar bulls to use sterling as the short side of a dollar long. I can’t remember the last time Far Eastern investors were so keen in discussing the UK economy and assets.
GBP/USD will struggle to stage a meaningful recovery until the dollar rally runs out of steam.
- I didn’t think we would go below GBP/USD 1.10, but sterling’s capacity for overshoot is well understood. The divergence between the Gilt/Treasury spread and GBP/USD (below) is even more dramatic now than it was in March 2020. That time, the Fed came to the rescue (for sterling and other currencies), but I’m not holding out any hope of easier Fed policy, and not much of any co-ordinated policy move to stop the dollar’s rise.
Sure are wild times for GBP!
