GBP/USD Forecasted Higher in Short-Term, But Lower in the Longer-Term Timeframe
Lloyds Bank Research tell us what to expect for the Pound / US Dollar exchange rate pairing this week:
"In the UK, the pound extended its gains last week as the trend of positive UK data continued. This also saw a widening disconnect between market implied interest rate expectations and the intent behind the Bank of England’s ‘forward guidance’.
"Meanwhile, benchmark UK 10-year gilt yields climbed above 2.7% for the first time since October 2011. Although there are few key releases this week, the second estimate of UK Q2 GDP on Friday could elicit an upside surprise, while the first look at the expenditure components will draw attention.
"However, the dominant theme in global markets remains speculation of when and at what pace the Fed will reduce its asset purchases. Data last week supported the view that ‘tapering’ could be announced at the September FOMC meeting, pushing global bond yields higher and unnerving equity markets. US 10yr treasury yields climbed above 2.8% for the first time in over two years.
"Focus this week will be on the minutes of the July FOMC meeting on Wednesday and July existing home sales (Wednesday) and new home sales (Friday). The annual Jackson Hole symposium from Thursday will also draw interest as central bankers and leading academics share their latest views on monetary policy."
US Dollar Forecasted to Gain Against the British Pound as we Head Into Year-End
The British Pound has enjoyed a strong run against the US dollar as of late; however analyst Chris Walker at Barclays reminds us that the pro-US Dollar assumption amongst many currency market commentators remains in favour:
"The USD had choppy price action last week, due to mixed US economic data and thin market liquidity. While manufacturing sentiment and consumer confidence fell unexpectedly from the recent highs, retail sales and jobless claims data support our view of modest pickup in the US economy in H2 13 and steady improvement in US labor market conditions.
"And we continue to expect the Fed to start tapering in September and the USD to appreciate against major currencies into the year-end.
"We continue to expect the GBP to weaken against the USD on relative economic/monetary policy outlooks, with the Fed likely to start tapering in September, and look for GBP/USD at 1.48 in 12 months."
Technical forecasters favour GBP/USD gains
Turning to the charts, analysts at ICN Financial Markets warn of further GBP/USD upside:
"The upside move last week pushed the pair to trading close to 88.6% correction at 1.5645 as shown on graph. Stochastic offers negative and overbought signals, but at the same time, Linear Regression Indicators are positive and shows that breaching 1.5645 will be followed by a new bullish wave targeting 1.5750 and perhaps 1.5875.
"The positive possibility will remain valid by stability above 1.5550, keeping the pair above Linear Regression Indicator 34.
"The trading range for this week is among key support at 1.5390 and key resistance at 1.5875. The general trend over short term basis is to the upside as far as areas of 1.5100 remains intact targeting 1.6010."
Markets testing the Bank of England
Stephen Gallo at BMO Capital Markets says FX markets could be testing both the ECB and the BoE. Thus, further gains in GBP/USD may be possible even if markets move away from a fundamental underpinning:
"With the normal disclaimers concerning low turnover, thin summer markets and position shakeouts all still applicable, we’d be very surprised if the persistent upward pressure on EUR/USD and GBP/USD didn’t in part reflect the typically antagonistic and rather careless tendency of FX market participants to inflict pressure where the pressure points are the greatest.
"In this case, those pressure points relate to the desire of investors to pull the ECB and the BoE out of their “bluffs” and thereby test the Banks’ true abilities to sit on their respective yield curves and physically keep rates anchored – particularly at the front-end.
"In basis point terms, UK and German 2-year rates actually rose more than their US counterpart this morning in London.
"If such “testing” by FX markets continues, there is yet another, perfect avenue here for EUR/USD and GBP/USD to depart away from medium-term fundamentals to the upside."