Weakness in the US dollar has been reasonably broad based this year. Against the GB£, it’s down 5.7% YTD. It’s fallen further against the EUR (-8.2%) and the JPY (-8.4%). Recently that weakness has been most notable against the Taiwanese dollar (TWD), which is up 10% against the USD in the past two days. Reportedly that’s been driven by local life insurers*, as well as speculation that a US trade deal would include provisions to strengthen the TWD. Elsewhere there’s been pressure on the Hong Kong dollar peg (with the HK central bank intervening overnight to slow the appreciation of the HKD).
Arguably, therefore, markets are starting to price in a “Mar-a-Lago Accord”. That’s been proposed by some of Trump’s economic advisors, as a strategy for devaluing the dollar, supporting domestic manufacturing in the US, and reducing the trade deficit. The name is inspired by the 1985 Plaza Accord (in which key economies successfully coordinated to weaken the dollar). Added to that, there are other reasons to expect a weaker dollar in coming years (see Longview research for detail).
In the very near term, though, the dollar appears to be over-extended to the downside on many measures. Price action in the GB£ is interesting in that respect. Technically, for example, it’s recent upward momentum has started to fade at a key level (the September 2024 highs, see Fig 1). It’s also overbought on our key market timing model (Fig 1a), and bullish sentiment towards the GB£ is at its most extreme since 2021. Furthermore, the recent rally in the GB£ has not been confirmed by the relative US-UK interest rate differential (Fig 1b). The near term sell case for the GB£ is therefore building.
Fig 1: GBPUSD futures shown with 50 & 200 day moving averages
*Who have large USD bond portfolios and have reportedly been rushing to hedge their currency exposure in recent weeks (i.e. selling the USD/buying the TWD).
Fig 1a: GBP Market Timing Model vs. GBPUSD spot rate
Fig 1b: UK 1 year Gilt yield LESS US 1 year Treasury yield (bps) vs. GBP/USD
