GBP: Forecasts for Pound Sterling to Euro + Pound to Dollar Sees Critical Resistance And Potential Profit-Taking Ahead

The GBP exchange rate complex powered higher after it was announced by Carney that the time for a rate rise was drawing ever closer.

At the start of the new week, the pound to euro exchange rate (GBP to EUR) is trading 0.03 pct higher at 1.2529. If we consider that the rate was in the 1.23's on the previous Monday we are able to see just what a good week the UK currency has had against the euro.

Also offering good levels is the pound to dollar exchange rate - the pair is 0.08 pct higher at 1.6982, we have seen the pair hit 2014 highs earlier today when it broke above 1.7.

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Meanwhile, those keeping an eye on the commodity currencies such as the New Zealand and Aus Dollars will be keen to take advantage of the relief the uptick in the pound is offering.

Interest rate differentials between the UK and Australia and New Zealand continue to favour ongoing strength in AUD and NZD longer-term.

Reactions and forecasts: Where next for the pound sterling exchange rate?

• Lloyds Bank tell us:

GBP performed well yesterday without really making a convincing break higher.

"But Carney’s comments at the Mansion House indicating that UK rates could rise sooner than the markets expect propelled GBP sharply higher, through the 0.80 level in EUR/GBP and within touching distance of the 1.70 level in GBP/USD.

"While Carney provided no detail of how soon rates could rise, it is unlikely that he would have made such a bold statement without a real possibility that rates could rise this year.

"From here, the 1.70 level is the next target and seems likely to break today. Though moves beyond this may still prove difficult, yield spreads do suggest scope for gains and we would expect the pound to hold above 1.70 by the end of the day."

• Ipek Ozkardeskaya at Swissquote Research says:

"The pound rallied hard after the BoE Governor Carney said that the first interest rate increase may happen earlier than market expectations in his speech at London’s Mansion House Dinner.

"The Chancellor Osborne highlighted that the house prices stand at historical high levels and may place the financial stability at risk in the future.

"GBP/USD surged to 1.6987 for the first time since May 6th (same day, the Cable has hit 1.6996 high), the bullish momentum gained pace. The critical resistance stand at 1.6996/1.7000 (May 6th high / psychological level), stops are eyed above.

"EUR/GBP took a dive to hit 0.79869 for the first time since November 2012. The oversold conditions suggests upside correction pre-weekend.

"The RSI stands at 21%, the 30-day lower BB at 0.80275. Option barriers are seen at 0.80300 and 0.80750 before the week close."

• Turning to the economic implications of the move, we hear from Warwick Business School economist Professor Ben Knight:

"The prospect of an early rise in interest rates from Mark Carney, Governor of the Bank of England is no surprise.

"It is prudent and necessary. The recovery remains unbalanced despite the uptick in fixed investment in the first quarter of 2014. Exports fell in April while imports rose in response to more consumer spending.

"Imbalances across the regions of the UK could eventually lead to a continuation of the higher inflation evident in the latest data. The housing market is a particular concern, notwithstanding the latest news from the RICS of a slowdown.

"Southern England still leads the way but there are signs that the surge in house prices in that region is now spilling over into other regions of the UK as some house owners move from London to take advantage of the growing house premium of their houses to move elsewhere.
 
"The same pressures are also felt in the labour market which exhibits growing regional and skills imbalance. The Employer Skills Survey 2013 found 22 per cent of the 655,000 vacancies in the UK remained untaken because employers could not find workers with the right skills. Things have got worse.

"Using vacancy data from a survey of classified ads Adzuna have reported large regional differences in labour shortages with a strong North-South, with nine of the best 10 cities with less than one job seeker per vacancy based in the south.

"Skill shortages are often cited as a key factor holding back West Midlands manufacturing. So far this has had a modest impact on general pay levels but there are signs from recent surveys that this will pick up in 2014 especially in Southern England and eventually this will spill over nationwide to regions with much less labour market pressure.

"The effect of this will be pressure on overall UK price inflation made worse by the weak productivity position of the UK highlighted by the IMF at the end of last week."