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British Pound (GBP) 05/02: The Outlook for February Turns Bearish for the Pound Sterling

Updated: Our Live coverage shows the UK pound to be in a period of consolidation at the start of April 2014. With the March PMI series missing expectations the GBP has found little by way of impetus. However, all eyes are on the release of the Service Sector PMI on Thursday which should set the near-term tone.

Keep in touch with our Live Coverage Here. For the archived material for the day in question please scroll through please scroll down. 

By Gary Howes
Pound sterling exchange rates

British Pound FX Rates.

  • British Pound / Euro exchange rate: 0.28 pct down at 1.2045.
  • British Pound / US dollar: 0.3 pct down at 1.6277.
  • British Pound / Australian dollar: 0.3 pct lower at 1.8240.
  • British Pound / Canadian dollar rate: 0.48 pct lower at 1.8009.
  • British Pound / New Zealand dollar rate: unchanged at 1.9809.
  • British Pound / South African Rand rate: 0.45 pct lower at 18.0722.

  • BE AWARE: All the above quotes are taken from the wholesale inter-bank markets. Your bank will affix a spread to the rate at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

    14:53: GBP sees support levels hold

    The sell-off could have been worse, but most support levels have stayed true to sterling.

    "The GBP/USD held steady below 23.6% Fibonacci resistance for most of the last 24 hours, but rates pulled back from this level after a weak UK Services PMI figure in today’s early European trade. As of writing, the pair is nearing key long-term support at 1.6250 once again. This area served as strong resistance for the 2nd half of this year and has already led to substantial support so far this year. Traders will closely watch today’s ADP employment report and ISM Services PMI reading for guidance today." - Matt Weller at GFT.

    14:10: 1.6220 must hold for the longer-term bullish bias to hold

    The following note comes from Luc Luyet at MIG Bank:

    GBP/USD bounced yesterday. However, a break of the hourly resistance at 1.6367 is needed to suggest something more than a dead cat bounce.

    An hourly support now lies at 1.6257, while a key support stands at 1.6220. Another hourly resistance can be found at 1.6446 (03/02/2014 high). In the longer term, the technical structure favours a bullish bias as long as the support at 1.6220 holds. However, monitor the recent technical deteriorations (break of the support at 1.6305 (25/12/2013 low)) given the general overbought conditions. A major resistance stands at 1.7043 (05/08/2009 high).

    14:05: GBP could drift lower to 1.62

    Sterling is under pressure despite confirmation that the UK economy is ticking along nicely - certainly at a better pace than that of the Eurozone, and yet look at how the GBP/EUR has reacted!

    Just remember though, it's all about expectations, surprises and rate of change, and importantly expectations as to the mood over at Threadneedle Street as noted by Boris Schlossberg:

    "Overall it was decent report that indicates that the UK recovery remains on pace, but the markets were disappointed with the rate of change in growth which has slowed over the past several months.

    "The current reading puts the UK GDP growth for Q1 at 0.8% - which is a marked improvement from the year prior but not enough to jolt the BOE into a more neutral monetary posture.

    "The pair (GBP/USD) could drift lower to test key support at the 1.6200 level over the next several days. Tomorrow's MPC statement is unlikely to offer any fresh guidance only adding to the view that UK monetary policy will remain accommodative for the foreseeable future."

    13:06: GBP/EUR breaks 1.2

    The decline in GBP/EUR continues apace and has broken 1.2. Whether this level gives way is yet to be seen, but it serves to remind us just how fast fortunes can change in the world of FX. It would seem that it is Goldman Sachs who is on-target with their GBP/EUR forecasts for 2014 at this stage. (See comment and link at previous entry).

    12:22: Don't lose sight of the bigger picture

    Getting bogged down in the day-to-day moves of the FX markets can be problematic. Don't forget the big picture. Here is a roundup of the pound to euro exchange rate forecasts held at the major UK financial institutions.

    11:10: "Look for opportunities to profit from EURGBP downside"

    "More from BMO's Stephen Gallo, this time regarding the outlook for the EUR/GBP ahead of tomorrow's ECB decision:

    "EURGBP downside risks if the ECB chooses to suppress yields further

    "With a further easing of ECB policy on the cards, the better opportunity to play UK ‘divergence’ is via Europe and EURGBP. This is the case because rate spreads remained a key driver of EURGBP throughout 2013 (see Figure 2.). This dynamic looks set to continue for most of 1H 2014. We look for opportunities to profit from EURGBP downside by selling within the 0.828-0.834 range for the time being, expecting a move back to 0.815-0.820."

    10:43: It's not all that bad say BMO Capital

    Will February be a good or bad month for GBP? We are pretty bearish at the moment, but Stephen Gallo at BMO Capital seems a little more optimistic. A note to clients this morning says:
  • We think the risks of another ‘macro pru’ policy shift by the BoE in February may be bigger than consensus
  • The BoE can implement ‘macro pru’ policy shifts at any time, including at or between FPC/MPC meetings
  • We expect the GBP to remain firm in Feb. after the recent ‘clear out’ of GBP longs, but below the Jan. avgs.
  • Nominal spreads should continue to provide support on dips, but new ‘macro pru’ can deter aggressive buying
  • We expect GBPUSD to hold 1.623-1.640 with the Fed ‘tapering’, EURGBP a better ‘divergence’ play for now
  • 10:08: February will be challenging for GBP

    We see little that could shift the mood of markets at present and thus expect February to be a challenging month for those holding out for higher pound euro exchange rates.

    Expectations towards the UK economy must be re-calibrated; the recovery of the economy and its relative out-performance has been impressive and has carried sterling higher. The problem is, expectations have also grown.

    So markets will understandably need to recalibrate their expectations, and settle the pound exchange rate complex, through the course of this month.

    The Bank of England Quarterly Inflation report next week could however provide an upside surprise if it is shown the Bank is considering interest rate hikes within the next year.

    09:32: Sterling selling off

    Today's data has triggered fresh GBP selling. Expect a longer period of GBP weakness going forward courtesy of this result.

    09:30: Services PMI at 58.3

    UK Services PMI for January comes in at 58.3, markets were looking for 59.

    09:16: EUR/GBP uptrend remains valid

    A timely forecast on the Euro Sterling rate from ICN Financial, this in the wake of our entry at 09:14.

    "The pair is trading around 0.8285 and affected by the negativity of the MA 50 & 100, while the general uptrend remains valid over intraday basis depending on stability above 0.8160 and waiting for the breach of 0.8285 to face the resistance of the Falling Wedge at 0.8345."

    09:14: An emerging Eurozone recovery

    Be wary all you hoping for better GBP/EUR rates; the Eurozone is now certainly in recovery mode.

    Final Eurozone PMI Composite at 52.9 in December, highest since June 2011, up from 52.1 in December. The GBP/EUR is now 0.14 pct down at 12063. A bad UK Services PMI outcome will certainly see us testing 1.2 once more.

    09:09: GBP/USD, down and then up

    Brace yourself for some technical forecasting that isn't for the faint hearted. Roboforex present the following pound dollar exchange rate forecast:

    "The pound is forming an ascending structure. We think, today, the price may break descending channel and reach level of 1.6420. Later, in our opinion, the instrument may fall down to return to level of 1.6340 and then continue growing up towards target at level of 1.6680."

    09:03: GBP/USD bearish, EUR/GBP bullish

    Analysts at Swissquote Bank aren't too keen on GBP at present:

    "Trend and momentum indicators remain bearish, option offers are seen at 1.6350/1.6400. The 100-dma (currently at 1.6252) should continue limiting the downside pre-BoE policy verdict due tomorrow. EURGBP traded in the tight range of 0.82664/0.82820. We keep our tactical bullish positioning as long as the 21-dma support (0.82646) holds."

    08:27: Risk of a drop to 1.62 USD

    "If service sector activity accelerated in the month of January, we could see a stronger recovery in sterling. However if services slowed alongside manufacturing, GBP/USD could drop to 1.62. The Bank of England releases its Quarterly Inflation Report later this month and the changes in the PMI indices can affect their decision." - Kathy Lien @ BK Asset Management.

    07:51: Sterling weakness difficult to justify

    Lloyds Bank agree that risk to GBP remain to the downside at present:

    Today's services PMI will be the key domestic focus. Following the sharp drop in the index in December to 58.8 (from 60.0 in November) the market is expecting a modest rise in the January reading today to 59.0, despite the weaker than expected manufacturing PMI earlier this week.

    Sterling has been under some pressure over the past few trading sessions, and this weakness looks difficult to justify from a fundamentals perspective with UK data having been relatively decent of late. The softer GBP tone is perhaps better explained by a general weakness in risk appetite.

    A stronger print today may provide some support for GBP and may hold firm if risk sentiment recovers. A weaker print today would put pressure on GBP, which could prompt a test of the 1.6250 support in GBP/USD.

    07:45: No excitement in pound vs euro expected

    "The eve of the ECB meeting is unlikely to induce investors to take positions in advance. A slightly higher US services PMI survey is also unlikely to lead EUR-USD very far away from the 1.35 level." - UniCredit Bank.

    07:40: All eyes on Services PMI

    Markit Services PMI (Jan) is expected to read at 59.0, a touch higher than the previous month's 58.8.

    The precedent set by the two PMI readings thus far in February give us a rough guide as to how the British pound may react. A small miss or on-target outcome will likely see us revisiting this week's lows. A big miss will certainly see some fresh support levels broken. And a beat will probably encourage further consolidation.

    Unfortunately we are not hopeful of any major sterling gains anytime soon.

    07:30: Risks for British pound (GBP) move to next week's Inflation Report

    Where are the next set of risks for the British pound (GBP)? Nick Bate at Bank of America Merrill Lynch says this week's Bank of England MPC decision is unlikely to offer anything as we have the quarterly inflation report due next week:

    "In the absence of any statement on Thursday accompanying the BoE policy decision, the risks for sterling will have shifted into next week's Inflation Report. While we are medium term GBP bulls, there are immediate near-term risks to the currency.

    "First, the recent deterioration in global risk appetite is bullish for EUR/GBP, given the UK's external funding requirements. Second, the risk exists of a lower inflation outlook in the Inflation Report, given the rise in sterling and UK yields alongside weaker commodity prices since November. Third, there is the potential for a change in language around forward guidance. The first two are currently the largest risks for sterling, in our view.

    "The other key factor for EUR/GBP is the inflation outlook in the Eurozone. While we do not expect the ECB to act this month, following the latest soft CPI report, the central bank is likely to remain concerned and project a dovish tone. In this context, EUR/GBP is likely to be relatively range-bound in the near term, before continuing its downward trend."