Pound Sterling Forecasted to Gain versus US Dollar in Near-Term, But USD Strengthens Towards Year-End Warns Scotiabank

• The British Pound to US Dollar exchange rate is 0.3 pct higher on last night's closing rate; GBP/USD is at 1.5494.
• The US Dollar to British Pound exchange rate is thus at 0.6454.

NB: The above quotes are from the wholesale inter-bank markets. When passing on retail rates your bank will affix their own discretionary spread which is effectively the cost of your FX transaction. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering more currency. Please learn more here.

Driving the GBP/USD exchange rate higher on Wednesday morning was the latest employment data out of the UK.

"UK employment data handily beat market expectations as jobless rolls shrank by nearly twice the forecast helping to boost the pound in early London trade today. UK claimant count saw a decline of -29.2K versus -14.3K forecast but the unemployment rate remained steady at 7.8%. The prior months data was revised to -29.4K from -21.2k originally reported," says Boris Schlossberg at BK Asset Management.

Stephen Gallo at BMO Capital says, "for the GBP, at this stage FX market participants appear to be looking for something to buy other than the USD, and the general skew seems to be that the better UK data provide the opportunity to do so."

Schlossberg points out that this was the best labor data reading since February of 2009 as the claimant count rate declined to 4.3% while the fall in claims was the biggest since May of 2010.

"Overall, this was a very solid report which demonstrated that the UK recovery continues to gather momentum in H2 of this year as job growth picks up. The one key factor that may hamper growth is the lack of progress in wage increases as average earnings rose at 2.1% expected rate," says Schlossberg.

Outlook for the Pound Sterling to US Dollar Exchange Rate

Turning to the outlook for the GBP/USD exchange rate Luc Luyet at MIG Bank says further gains remain possible:

"GBP/USD remains in the midst of a consolidation/corrective phase off the recent 1.5574 high (08/08/2013). However, the dominant longer term structure is the strong recovery seen since the 1.5102 low on 02/08/2013.

"This is suggestive of a further recovery leg higher and with this in mind the minor set back that we have witnessed since the recent peak last Thursday is seen as a correction in a rising trend."

Geoofrey Yu at UBS says:

"Any downside will be limited, with a strong support at 1.5394. Key resistance is at 1.5598. A closing break above this would trigger further upside towards 1.5782."

US dollar forecasted to strengthen into year end

This afternoon we hear from Camilla Sutton at Scotiabank who warns that the US dollar is forecasted to strengthen over the course of the remainder of 2013.

Sutton says her bank expects the Fed to announce tapering at its September 18th meeting and that this will support the USD into year‐end; with the main risk to this view the release of nonfarm payrolls on September 6th. Scotiabank expect a September taper based on:

• US GDP growth is running above 2%, mainly on the back of strong trade data.
• Global growth outlook is improving, or at a minimum stabilising.
• Nonfarm payroll gains are averaging just below 200k and the unemployment rate has fallen to 7.4%.
• Comments by both voting and non‐voting Fed members suggest they are looking towards tapering.
• Market volatility is low, providing an opportunity to taper in a stable market. However we do expect that tapering will pressure vol higher, in the same way that central bank policy has helped to crush vol since early 2012.
• Waiting for a December tapering is complicated by January 2014 changes at the Fed, including a new chair and replacements for Pianalto, Raskin and Duke (and potentially Yellen if she is appointed as Chair) ‐ all voting members in 2014."
  
  So while the momentum may lie with sterling at present currency market watchers should be prepared for the strong possibility that a US Dollar rally into year end will be the dominant theme on the global FX space.