Forex outlook: dollar respite likely as sterling under focus

The dollar could get some short-term respite next week as sterling becomes the target of bearish investor sentiment after the Bank of England signalled weaker growth and set the tone for interest rate cuts next year.
With no major US economic reports due next week, housing data could provide more evidence of deterioration in the sector, where a sharp downturn has raised the prospect of weaker US growth and soured sentiment toward the greenback. Housing starts for October will be released on Tuesday.
Investors will be watching equities where third-quarter earnings from Target Corp and fourth-quarter results from D.R. Horton Inc and Hewlett-Packard Co should illuminate the scenario for consumer spending, the housing market and technology sector.
The dollar has tested successive record lows against the euro, but analysts reckon with much of the bad news on the US economy already priced into the market and the re-emergence of risk aversion, investors are growing reluctant to continue aggressively selling the greenback.
"Selling the dollar is not going to be the one-way ticket that it was last week, the previous week or the past month," said Ashraf Laidi, chief FX analyst at CMC Markets in New York. "Things are unravelling here partially thanks to sterling which is providing its own fundamental reasons for falling against the US dollar beyond just flight to quality into the dollar."
The BoE in its quarterly Inflation Report on Wednesday predicted a worsening outlook for growth, fanning expectations that it could start easing monetary policy early next year. Those predictions were also bolstered by a report on Thursday showing that British retail sales dropped last month for the first time since January.
"While one number does not make a trend it still suggests that we may have seen a peak in UK growth and the BoE recognises that and the next step in their monetary policy will be easing," said Boris Schlossberg, senior strategist at DailyFX.com in New York.
"All of that suggests the shift in sentiment toward the pound is likely to continue and should the data deteriorate further into this month, there is a very strong possibility that the pound could reverse the $2 handle," he added. Sterling last traded around $2.0459 and has weakened about 3 percent since touching a 26-year high above $2.1100 last week.The Federal Reserve has slashed its key fed funds rate target by a total of 75 percent since September.