British GBP/USD Rate Recovers But Forecast Below 1.30 For Lion's Share of 2016-2017

The GBP/USD has bounced following the ending of uncertainty as to who will be the UK's next Prime Minister, but the recovery will likely be short-lived with most analysts predicting the exchange rate to move below 1.30 by the end of the year.

The British Pound has been aided higher by political developments in the UK which have culminated in a new leader of the ruling Conservative party, and therefore the country, being chosen.

Theresa May's move to the highest office puts to bed the uncertainty created by the resignation of David Cameron following the UK's vote to leave the European Union.

However, the inbox that will greet May on Wednesday is overflowing and the task of negotiating an exit from the EU is gargantuan.

"It is important to note that while Sterling trades on the back foot due to uncertainty, as soon as we start to see the potential for a deal with the EU complemented by a strong leader in Theresa May, then we would expect to see Sterling regain some of its strength," says Chris Towner, Chief Economist at HiFX.

Technical studies show the GBP/USD pair to have reached support from a long-term channel line in the midst of a down-trend.

It has bounced off that line and moved marginally higher.

Given the strength of the dominant down-trend, however, the pair will probably resume its descent eventually, albeit possibly at a more gradual rate.

There is a possibility that a break below the 1.2796 lows could extend the down-trend, however, other analysts such as Commerzbank’s Karen Jones see 1.2750 as being of more significance.

Nevertheless, whether 1.2796 or 1.2750, a break below 1.2700 would add confirmation that both levels were broken, and open the way to a move down to the S1 monthly pivot at 1.2610.

At the level of the S1 the exchange rate would be expected to pause and possibly bounce higher since pivots are levels where demand increases.

The MACD is showing signs that it might be rounding out a bottom before turning higher – although this is by no means enough to suggest more upside is on the horizon.

As such overall we maintain our negative stance.

Jones sees the 1.2750 level as a key ‘last stand’.

It is comprised of the 78.6% Fibonacci retracement of the move from 1985 to 2007, which although strong is not as significant as the 50% or 61.8% level.

In relation to the 78.6% level Jones says, “This is currently holding and is regarded as the last defence for the 1.0463 1985 low. Rallies are indicated to terminate circa 1.3065/1.3235.”

Which suggests a break below it would usher in a strong down-trend towards 1.0463!

For us, a move well below the 1.2610 pivot, such as would be confirmed by a break below 1.2550 would probably also signal the start of a longer-term decay, all the way down to parity’s hinterland and the 1.04 lows.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3336▲ + 0.07% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2882 - 1.2935
**Independent Specialist	1.3149 - 1.3202 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Major Analysts see GBP/USD sub-1.30 by 2017

Confirming that any strength in the Pound-Dollar rate is likely to be short-lived is the most recent poll of analyst forecasts.

Bloomberg regularly poll the leading institutions for their views on the outlook and can confirm that the median level forecast for the turn of the year is 1.29.

It is interesting to note that the level is expected to be maintained through the coming year:

Bank of England Dominates the Outlook

The main event for sterling in the week ahead is the Bank of England (BOE) rate meeting on Thursday July 14.

There is a great deal of speculation as to whether the BOE will decide to cut interest rates to help stimulate the economy following Brexit.

ING Bank’s Viraj Patel has said that the probabilities of the BOE making a rate cut are finely balanced.

According to market-based methods of estimating the likelihood of a rate cut using the changing price of Interest Rate Swaps, the probabilities are 64% that the BOE will cut interest rates by 25 basis points or 0.25%.

However, Patel also acknowledges that whilst he believed there would be a rate cut, ING’s economists did not thing there would be one due to a lack of available econometric evidence since Brexit which only occurred at the end of June.

They expected the BOE would want to first see what the scale of the slow-down looked like before making a decision on interest rates.

This too seems a cogent argument for expecting the BOE to take a ‘wait-and-see’ approach.

ING’s Patel sees little chance of a strong rally in sterling as a result of a decision to put rates on hold, as only a small fraction of its decline has resulted from expectations of a rate cut.

Even if there is no interest rate cut at the July meeting, the forward guidance in the statement is likely to suggest there will be an interest rate cut at a later stage.

The risks to the pound to dollar are tilted to the downside following June’s Non-Farm Payroll (NFP) release which showed a bumper recovery in jobs.

Overall, Patel’s call is to sell GBP/USD with a target at 1.2700.

Teresa May to be next Prime Minister

The pound caught a bid on news that Andrea Leadsom stepped down, ensuring Theresa May will now be the next leader of the conservative party and prime minister.

The fact that Teresa May will be next leader of the Conservative party, and therefore the next prime minister of the United Kingdom, reduces one of myriad sources of uncertainty.

"The good news is that Mrs. May is an experienced politician who is a known quantity in Brussels. She may also get a more sympathetic hearing from other EU leaders given that she campaigned on the side of Remain and may thus be in a better position to cut a deal. But she clearly has her work cut out as the difficult task of balancing the UK’s national interest with those of other EU members will take time to evolve," says Peter Dixon at Commerzbank.

The pound may also have gained a boost as it is not expected that May will take a hard line in any divorce negotiations with the EU.

This may also favour her with EU diplomats as they will not see her as a member of the Brexit group.

This might help Britain get a better deal, and could therefore be seen, on balance as improving the outlook for the economy.

May is also an experienced politician and seen as a capable 'pair of hands'.

The US Dollar: What to Watch

In the week ahead the main data releases for the US are Factory Gate prices on Thursday, also known as the Producer Price Index (PPI), which is expected to come out at 0.3% mom in June from 0.4% previously.

These will be read in light of the increased possibility that the Fed may raise interest rates due to the rebound in Non-Farm Payrolls in June.

A higher-than-expected increase in producer inflation will increase the probability that the Federal Reserve will raise interest rates.

On Friday Retail Sales for June will also be released, and is forecast to show a 0.1% mom rise versus the 0.5% previously.