Financial market research and analysis

Appetite in USD is at risk as the durable goods order in the US is expected to have contracted by a significant 2.3% on month to August as the weakness in the energy sector and low export demand in metal and machinery have certainly worsened during August and judging from the sluggish macroeconomic fundamentals, the weakness in US durable orders have seemingly more to run. If today’s data confirms the market qualms, the Fed hawks could retreat to the sidelines, letting the USD give back some of its recent gains to the end of the week.

The US sovereign bonds price in less than 20% probability for a Fed rate hike before the end of the year.

The euro, yen and pound are firmer against the US dollar today, well supported by an increasing demand for safe haven assets.

Pound has potential to gain

Yesterday, the pound rebounded from 1.5221, a stone’s throw lower than the Fibonacci 50% retracement on April-June rise. The recent depreciation in pound has helped cooling down fears that stronger pound could jeopardise UK’s growth performance. Nonetheless, the pound may have reached a bottom and could be expected to head north despite the dovishness from the BoE officials.

Also, there is not much room left for a BoE doves at this point. The BoE, in opposition to many central banks, does not have flexibility to loosen its policy. Given that there is only one direction at disposal, the pound is benefiting from a period of undervaluation against the US dollar and the euro. Technically speaking, the pound has no particular reason to trade below 50% since it rebounded from April bottom. Especially, the positive outlook in wages suggests that pound's fair value is closer to 1.60 mark than 1.50 against the US dollar.

Hence a fair value would have been 1.60 against the US dollar and 0.70 and below against the euro. Given the already undervalued pound, there is not much momentum to collect on the downside. If the market does not react to BoE doves, it is a sign that we are getting close to exhaustion on the sell side in the pound market.