The U.K. pound held steady against the dollar on Tuesday, despite claims from the International Monetary Fund (IMF) that the currency is overvalued. But with the resurgent greenback set to react further to economic data coming from the U.S., many analysts now argue that sterling has reached a tipping point.
The pound has appreciated over 11 percent against the dollar over the last year, in anticipation of a hike in interest rates by the Bank of England and following stellar economic data for the U.K.
It has fallen back against the dollar over the last week, after flickering around the $1.70 level since the start of the month, although it remains near a two-year high versus the euro.
Angus Campbell, senior analyst at brokerage FXPro, said that sterling's recent dip had been due to profit taking by traders after its impressive rise, but he said the losses could be about to accelerate.
"(Sterling) is susceptible to seeing further downside especially if this afternoon's U.S. consumer confidence, which is expected to rise from 85.2 to 85.3, comes in higher," he said in a morning note on Tuesday.
Michael Hewson, a market strategist at CMC Markets, said the lack of a rebound from the pound was concerning, and that any break below $1.6950 could trigger a sharp roll over towards $1.6845. The pound stood at $1.6971 at 11 a.m. London time.
Kit Juckes, global head of foreign exchange strategy at Societe Generale, agreed. He was one of many strategists left wrong-footed by the pound's climb above $1.70, but said in a research note on Tuesday that he could just have been wrong on "timing and level", and implied the currency may be about to move lower.
It comes after the IMF weighed into the debate on Monday, saying in its annual assessment of the U.K. economy that the currency is 5-10 percent overvalued. The Bank of England declined to comment on the IMF's views.
The analysis will do little to quell concerns from the U.K.'s exporters, who have cited currency headwinds as one reason for weakening revenues in recent earnings reports. Indeed, a report from audit firm EY on Monday showed profit warnings from U.K.-listed companies had hit their highest level in three years, with sterling's strength cited as a key reason.