The British pound (GBP) took a negative turn in the second half of 2014 and it appears to be a case of 'more of the same' in 2015.
A range of fundamental forecasts issued by big-name currency analysts, including HSBC, Morgan Stanley and Barclays confirms the outlook favours the USD over the GBP in the longer-term.
What we do note however is that the rate of decline will likely slow as we approach historical lows - the US growth story will eventually be fully incorporated into the price of GBP/USD and it is at this time that a base to declines will form.
- At the time of writing the GBP to USD is seen at 1.2718.
A look at recent price action shows the GBP could be basing:
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Exchange Rate Forecasts for GBP Against the US Dollar
A look at what the best and brightest at the world's largest investment banks shows declines through much of the year before the rate stabilises.
The median call, as supplied by Reuters, is for the rate to fall to 1.5200 by mid-year and 1.51 by year-end.
The maximum level at year-end is 1.61 and the minimum exchange rate is located at 1.37. "This means that for every $1 million changed to sterling, you could be more than £100,000 better or worse off," point out Future Currency Business in a note to clients on the matter.
We see the worst of the declines located at 1.40 from a technical perspective. Why - see our synopsis of why the 1.40 level is so technically relevant to GBP/USD's future direction.
According to Carl Hasty at Smart Currency Business the path for sterling dollar is dependent on Central Bank decision making:
“The question is whether the US will raise interest rates before the UK. Although the US economy appears in better health, UK unemployment has been falling.
“However, the Bank of England (BoE) has been cautious in its approach to interest rates and slack in the economy, so it is still uncertain which of the two major economies will act first.”
The US economy rebounded admirably from a slow start to 2014 with growth overtaking that of the UK. The US saw improved employment levels, and the US Federal Reserve completed its withdrawl from its QE programme in October 2014.
US Economic Optimism Continues to Drive USD Valuations Higher
Optimism among US businesses and consumers is the highest in many years and has recently received new support from falling gasoline prices.
As we see here, growing confidence begets further confidence thereby attracting money flows.
According to Hasty, it is difficult to bet against the dollar in the current environment, but sterling could take the upper hand given the chance:
“It is very difficult to bet against the US dollar in the current climate.
“Against a basket of currencies, the US dollar is close to four-year highs and has been the best-performing major currency of 2014. Interest rate increases are very much on the horizon as the economy continues to grow and employment to fall.
“The UK economy is certainly much closer to the US than the Eurozone, but the BoE, with justification, is reluctant to increase UK interest rates too soon given our dependence on the Eurozone economy and the lack of traction in wage increases.
“The major banks do see further weakness for sterling, but in no way outright capitulation, and if there is an undue blip in the US economic performance, or a reduction in the likelihood of increased interest rates in the first half of 2015, we could see sterling take the upper hand.”
Rate Profile Should Keep GBP Soft
"The market is now pricing a shallower rate hike profile for the UK, with only 75bps of hikes expected by end-2016. Headlines over the weekend are unlikely to provide any respite for GBP, with comments from both Governor Carney and Haldane striking a dovish tone. Both showed concerns about inflation, while the comments were broadly inline with the QIR, this will likely keep GBP on the back foot," say Lloyds Bank.
Both showed concerns about inflation, while the comments were broadly inline with the QIR, this will likely keep GBP on the back foot suggest Lloyds.
Data over the coming week will be a focus with CPI, retail sales, and MPC minutes all due. However, the minutes are unlikely to provide any additional insight following last week’s Inflation Report, our economists expect 7-2 vote to prevail.
The timing of the first rate hike has been pushed as far back as 2016 by one major bank. On Monday the 17th HSBC economists informed markets they see the first interest rate rise happening in the first quarter of 2016.
If the rest of the market were to take such a view then sterling will no doubt fall as consensus sees the first hike in Autumn 2015.