GBP/USD Rate Forecast to Hit 1.28 and then Recover (If this Double-Bottom Proves True)
The GBP to USD conversion has fallen below the key 1.30 level and now looks poised for deeper declines according to analysts.
The GBP/USD is trading below the key 1.29 marker at the time of writing at 1.2895.
The move lower fulfils the next stage in the journey towards the 2016 lows located just below 1.28, something that we would expect to be achieved over coming days.
From a technical perspective, last week's break below the 1.30 mark was a key bearish signal, as it is an important psychological level.
Importantly though, it would not look strange on the chart if the FX rate were to fall to 1.28, then recover as it did in July, move back up, and in the process form a double bottom reversal pattern.
Double Bottoms occur where prices are in the process of basing and reversing trend from down to up.
Confirmation of more upside would require a break above the double bottom’s neckline at circa 1.3400 for confirmation - with an upside target thereafter at between 1.37 and 1.38 probably, depending on where the 50-day moving average was at the time.
So the bulls will be putting their money on the double-bottom holding out.
We would however caution that even were a bounce to take place consensus is overwhelmingly backing a continuation of the decline in GBP/USD.
Hantec Markets' FX analyst Richard Perry, comments that he expects more downside for GBP/USD:
“The sterling bulls have again been unable to gain any traction in a recovery and the outlook remains negative for Cable” he says.
Furthermore:
“The daily chart shows that any rallies (even if they last more than just a day) should still be seen as a chance to sell and I favour continued pressure back on the $1.2954 low from this week, before testing the July lows of $1.2850 and the 31 year low at $1.2796.”
Commerzbank’s technician Karen Jones is likewise bearish, arguing the pair has probably broken out of a triangle pattern, with a downside target activated at 1.2415.
Lloyds Commercial Banking’s Robin Wilkin foresees the likelihood of more downside on the horizon for the pair whilst it remains below 1.3100/25 resistance.
“While under this resistance the bias is still down. A break of 1.2950/35 should open the low, with little support below there till the 1.25 region," Wilkin says.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3328▲ + 0.01%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2875 - 1.2928 |
**Independent Specialist | 1.3141 - 1.3194 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
A Busy Week of Data Releases for GBP
With the Bank of England pumping money into the economy, and devaluing Sterling in the process, analysts will be watching for evidence in the economy that would suggest even more easing will be announced before the end of 2016.
One of the key numbers to watch will be inflation.
With Sterling falling following the EU referendum the Bank has recently had to ramp up their inflation forecasts, owing to the rising cost of imports.
The Bank notes the 2% level they are tasked with targeting could be hit a lot sooner than originally envisaged.
A faster-than-forecast rise in inflation could well prompt the Bank to consider holding back on that stimulus, which in turn is a positive for the Pound.
Analysts are forecasting a 0.5% rise compared to July last year.
On a monthly basis inflation is expected to rise 0.2%.
On Wednesday the UK will release important employment and earnings data, however, due to it covering only June which is mostly before the EU vote its significance this time will be lessened.
Average Earnings is expected to rise a basis point to 2.4% from 2.3% previously. The Unemployment rate stands at 4.9% and 3month/3month change was 194k in May
Retail Sales data on Thursday rounds off the week, and markets will be looking for evidence on whether the all-important consumer has turned shy following the EU vote.
This data will be important as it is covers July, and so will provide an idea for how well certain parts of the economy are bearing up.
Recent data from the British Retail Consortium (BRC) showed an unexpected 1.1% rise in retail sales in July when investors had been forecasting a Brexit-inspired contraction.
The higher than expected result was explained as a ‘life goes on’ shrug of the shoulders response from consumers and due to households not yet feeling a material impact from the referendum result. Especially hot weather which increased barbeque, charcoal, food and drink sales, as well as fashion sales was also a factor.
The 0.2% rise from -0.9% previously and steady 4.2% gain y-o-y forecast by analysts reflect BRC data’s increased optimism about July.
Inflation Data Dominates US Economic Docket
The week starts with Building Permits on Tuesday August 16, which are expected to show a 0.6% rise; Housing Starts are expected to fall -0.8% mom (from a high previous month’s result).
These are followed by inflation data for July, which is forecast to show a 0.2% rise mom and 0.9% (from a previous 1.0%) year-on-year.
"Lower than expected US CPI today would further add to the recent soft USD environment and underpin the EM FX rally of late, high yielding FX in particular," says Petr Krpata at ING.
Real Average Weekly Earnings in July (yoy) are also in the calendar for Tuesday and are likely to be closely watched for their potential impact on the Federal Reserve’s anticipated policy trajectory.
On Wednesday the Fed meeting minutes will be released as well as Cushing US Oil Inventories. Clearly the minutes will be scoured for potential insights into then the next rate hike could be - although this often overly hyped release often ends in no discernible change in the outlook as it rarely contains new information.
The week ends with the Philadelphia Fed Manufacturing Index on Thursday August 18, which is forecast to rise to 1.5 from -2.9 previously.
