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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.
A stronger pound means that foreign consumers and companies have to pay more for U.K. goods and materials, but Juckes argued that the currency's moves were not as significant to the U.K.'s economic recovery as some have claimed.
"U.K. exports are much less currency-sensitive than some seem to believe," he said, explaining that the U.K.'s biggest export market - Europe - is in a long-term economic slump and British exports would suffer despite an uneven exchange rate.
"The key to improved export performance are investment and education more (than) hoping a cheap currency would boost competitiveness," he added.
Currency traders looking to bolster their short positions on sterling against the dollar will also take note of comments from brokerage firm Monex Europe's Eimear Daly, who was one strategist that wasn't caught out by the pound's move above $1.70.
She now predicts that an important week for the dollar - which includes U.S. growth data, jobs data and a Federal Reserve decision – leaves the door open to some possible downside.
"Markets have an inbred belief that the dollar's true value is higher and the trigger is the Fed moving towards hiking. As such they are piling into monetary policy divergence plays early, and the dollar is heading into this week's trading with a high degree of disappointment risk," she said in a research note on Tuesday.