GBP/USD Rate Poised for Another Move Higher, But US Fed Meeting is Key Test

For the GBP/USD exchange rate, the fundamental highlight of the coming five days will be the US Federal Reserve who meet on Wednesday and could potentially signal a new round of pro-USD interest rate rises.

The British Pound starts the new week trading above 1.3127 - well within its July range which encompasses a low of 1.28 and a best of 1.3477.

GBPUSD again tested the lower bound of its interim range after the weak one-off “flash” UK PMIs, but, importantly, held the 1.3065 level.

The question most will be asking is whether the UK currency can make another attempt at the July highs once more.

"While above here, price action is consistent with the development of a potential head and shoulders base. A rally through 1.3315 is needed to add conviction to this view, and would open up a re-test of the 1.35-1.38 region. A break below support at 1.3065-1.2945 would expose the range lows at 1.2798," says Robin Wilkin, a technical strategist with Lloyds Bank.

We believe the signs are encouraging for those hoping for a stronger Pound as the GBP/USD pair looks like it has bottomed and is poised to make another break higher:

It has probably formed a rough inverse head and shoulders at the lows and is currently trading in the area of the right shoulder.

The MACD momentum oscillator in the bottom pane is pointing up indicating more upside is likely.

The chart overall has a bullish feel despite the strong Brexit sell-off.

The formation of the loop-like bottom in early July, which is also the head of the inverse H&S, makes it less likely we will see a break down to new lows.

Overall a move higher is more probable, initially to the neckline at 1.3500, and then following a clean break above that, to the next target higher at 1.3800.

A break above the July 18 1.3315 highs would probably lead to a move up to the slanting neckline at around 1.3440.

A break above 1.3500, would then confirm an extension up to 1.3800.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3335▲ + 0.07% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2882 - 1.2935
**Independent Specialist	1.3148 - 1.3202 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Wilkin argues that taking a longer-term view shows the decline through the 2009 lows at 1.35 is viewed as the last phase in the bear trend that started back in 2007 from the 2.1160 highs.

"We favour a multi-month bottoming process. What isn’t clear yet is whether the current rebound from the 1.2800 region is the start of this process. A decline through there sees next major support in the 1.22-1.18 region," says Wilkin.

US Federal Reserve Dominates the Calendar

The most important event next week for GBP/USD will be the policy meeting of the Federal Reserve on Wednesday July 27.

It is possible we may see a more hawkish upbeat message from the Fed, probably paving the way for the likely reinstatement of expectations for a 2016 rate hike.

Financial markets have settled down after the short-lived volatility which followed Brexit and June Payrolls beat expectations, coming out back above 200k.

Morgan Stanley's, head of research, Hans Redeker, for example, now sees a 50% probability of a rate hike by the end of the year.

“Our economists expect next week's Fed meeting to be ambiguous, keeping options open. Market pricing of the probability of a Fed hike this year has moved up to 50%, a level with which the Fed is likely comfortable. We comfortable. We believe risk-reward going into the Fed meeting is fairly balanced, leaving us comfortable holding USD shorts through the meeting,” says Redeker.

US Data on Tap

As far as data in the previous week goes, none was major or particularly market moving, but it did show the housing sector in fine fettle.

Building Permits showed a small uptick of 1.5%, Existing Homes Sales also rose more than expected, but the Philadelphia Fed Manufacturing Index declined to -2.9 from 4.9 previously when 5.0 had been expected.

Nevertheless, markets do seem to be starting to change their expectations from seeing the next Fed rate rise in 2018, to sometime earlier.

As far as the week ahead goes - the preliminary second quarter GDP data on Friday is the main hard data release.

Markets have been eagerly anticipating how US Q2 growth will look ever since Q1 was figures came out so badly.

The big question about Q2 will be was it as bad as Q1, and therefore start to show a trend; or will it bounce back, showing Q1 was just an anomaly.

Broker TD Securities see the chances favouring an upside surprise: 

"TD forecasts GDP growth to accelerate as underlying growth momentum recovers from the subpar 1.1% q/q pace in Q1. The rebound is expected to be driven by personal spending activity, which should boast its strongest gain in two years."

June Durable Goods orders are scheduled for Wednesday morning, but unlikely to impact since markets will probably be moribund going into the Fed rate meeting.

Also out on the same day is Pending Home Sales.

On Tuesday we shall see Consumer Confidence in July, which is forecast to fall to 95.5, and New Home Sales, which are forecast to rise to 560k.

Up and Coming UK Data

Second quarter GDP data is the main release for sterling in the week ahead.

Currently analysts are expecting a 0.5% rise from 0.4% previously (qoq), and 2.1% from 2.0% yoy.  

The result will be overshadowed by the negative impact of Brexit, however, which renders the data for April-June somewhat redundant in terms of future economic developments.

"While above here, price action is consistent with the development of a potential head and shoulders base. A rally through 1.3315 is needed to add conviction to this view, and would open up a re-test of the 1.35-1.38 region. A break below support at 1.3065-1.2945 would expose the range lows at 1.2798," says Robin Wilkin, technical strategist with Lloyds Bank.

The question most will be asking is whether the UK currency can make another attempt at the July highs once more.