GPB/USD: Best Monthly Exchange Rate Could be Tested Once More

The pound sterling retains the advantage over the US dollar with momentum indicators advocating for further gains.

The pound to dollar exchange rate (GBPUSD) remains positively aligned with a number of momentum indicators confirming further upside could be likely.

The GBP/USD is trading above the 20, 50 and 100 day moving averages confirming buying interest outweighs selling interest in multiple timeframes.

As such, a test of the intra-month best exchange rate at 1.5818 struck on the 25th looks achievable.

Watch the support area at 1.57; this round numbered level has seen advances thwarted on numerous occassions over recent months and now serves as support. 

A break below here exposes the 20 day moving average which could arrest declines, this support zone is at 1.5624.

Central to the pound / dollar's fundamental outlook is the timing of the US Fed's first interest rate hike, formerly priced in for September.

The dollar has taken a beating as Chinese market ructions have seen foreign exchange markets bet commencement will be delayed. The second we get a firm sense that September is still in fact viable we will see the dollar rally.

"In the face of ongoing global risks, the outlook for monetary policy in the US continues to remain uncertain. Later today, New York Fed president Dudley’s, who is a current voter on the FOMC, speaks at an event (15:00 BST) should provide some insight into his views on how much caution is warranted in tightening policy, given recent events in China," say Lloyds Bank in a note to clients.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3347▲ + 0.16% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2893 - 1.2947
**Independent Specialist	1.316 - 1.3214 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

China Hits Pound and Dollar, Euro Wins

Watch the ongoing dynamic around China in the near-term - it is by no means done.

The reason for the falls in the pound to euro and euro to dollar exchange rate pairings at the hight of the tensions on Monday rests with the implications the global market sell-off has for the Bank of England and US Federal Reserve.

In short, currency markets now reckon the Fed and BoE are highly likely to delay raising interest rates.

The hope of higher interest rates is what has sustained the impressive valuations of the GBP and USD over recent months.

We would have thought 1.40 in GBP/EUR would have provided support and warned that if it broke 1.36 would be tested, this appears to have played out.

1.36 could hold but in times of hightened volatility anything is possible.

The Shanghai Composite fell by over 8.5% on Monday setting off a chain of losses that included the biggest one-day sell off in over 2 years for the Nikkei and over 6 years for the Australian Securities Exchange.

“The People’s Bank of China remains in ‘see what sticks’ mode, and so far nothing has been able to provide an adequate tourniquet for the market-wide bloodshed that has only intensified this Monday,” says Connor Campbell at Spreadex in London.

The latest move by the PBOC saw the central bank announce that local government-managed pension funds will be able to invest in the markets for the first time, in an attempt to pour billions of yuan into an equity market that is currently drowning in losses

The move only inspired panic selling with investors fleeing in droves.

At points the FTSE has hit prices not seen since the start of 2013, sporadically plunging below 6000 and remaining firmly in correction territory.

"Of course the UK index’s dramatic decline is being fuelled (pardon the pun) by the rampant evacuation of investors in the commodity sector, as Brent Crude and copper hurtle towards fresh lows," says Campbell.

The winner is the euro which looks to be a safe-haven currency in this context. Again, we must remember that interest expecations are the big problem for the pound sterling and US dollar.

We will ultimately need the markets to find fair value for GBP and USD and this will be done via repricing the interest rate outlook.

Commodity Currencies Hammered

The pound has meanwhile rocketed to new highs against the South African rand, Australian, New Zealand and Canadian dollars.

We mentioned that commodity prices have plummeted and thus the commodity currency complex is being harmed.

AUD/USD printed a 6-year low as China’s stock market rout raised questions about global demand.

The Aussie reached 0.7201 in Tokyo and is now trading slightly above the 0.72 threshold.

The Canadian dollar is down 0.40% against the greenback as USD/CAD broke its low from August 5 (1.3213). ON the upside, the next resistances stand at 1.3384, then 1.40.

In New Zealand, the stock market is down 2.50% while the Kiwi lost 1.26% against the US dollar as Deputy Governor Grant Spencer declared that the RBNZ has no choice to cut interest rate further despite disastrous housing situation, especially in Auckland where prices rose 21% year-over-year in July.

The RBNZ is aware that a low interest rates environment contributes to inflate the housing bubble, however new lending rules will be implemented on November 1 in an attempt to curb speculative investments in real estate.

NZD/USD erased previous gains and is back below the $0.66 threshold.

Since mid-July the pair is moving sideways between 0.6740 and 0.6470 as dollar bulls lose faith in a September rate hike while in New Zealand, more economic data are needed to determine whether a weaker Kiwi is required to put back on track the economy.

GBP Could Lose Ground Against the Euro Though

Chris Towner, director of FX advisory services at foreign currency specialists, HiFX, comments on China’s Black Monday:

“Risk aversion is back in the financial markets. A combination of threats of tightening monetary policy in the US and UK with China slowing has created nervousness and this nervousness is now spreading to panic. The chances of a rate hike now in September in the US has reduced from a probability of over 50% to a possibility of less than 5%.

“The interesting dynamic here though is in previous forays of panic, the US dollar has strengthened; however as the US dollar is over-valued, it is the euro that is the currency in demand.

“This is feeding through to GBP/EUR and last week we were dealing up at 1.4200 and this week we are dealing at 1.3650. We can expect more of this to come as well, as the market re-adjusts to the risk event that we don’t see any rate hikes in the US this year, as warnings yet again prove to be powerful enough to turn the market."

Meanwhile, sterling neared a two-month high against its wobbly U.S. counterpart.

However, the more toxic market backdrop also left sterling vulnerable as the climate augured easier or lower rate policies from central banks instead of tighter policy like a rate hike.

"Both the Fed and Bank of England are perceived at the head of the line to raise interest rates. However, central bank rate hikes are seen on hold until order and stability return to global markets. With the flimsier shape of China, this could take a while, leaving the U.S. and U.K. currencies exposed to further downside risk," says Joe Manimbo, corporate dealer at Western Union.