Is a British Pound to US Dollar Exchange Rate Rally on the Cards Today? Outlook for GBP/USD on Non-Farm Payroll Day

"Eyes are set on the afternoon’s US nonfarm payrolls data. Any disappointment should reinforce GBP-bulls. Option bids are building at 1.5700 and we keep our eyes set on 1.5753 target. On the downside, 1.5550/66 (21-dayMA) should provide support; traders are likely to remain on the long side of the play," says Ipek Ozkardeskaya at Swissquote Research.

A look at the spot market exchange rates in early afternoon London trade shows:

• The Pound to US Dollar exchange rate is 0.1 pct down on last night's closing level at 1.5575.
• The US Dollar to Pound Sterling exchange rate is at 0.6420.

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Data to watch

Undoubtedly, the next big driver of the British Pound to US Dollar exchange rate will be today's non-farm payroll data.

Nonfarm Payrolls (Aug) are expected to come in at 180K; a big disappointment will likely drive US Dollar selling.

The unemployment rate is expected to come in at 7.4%.

Kathy Lien at BK Asset Management says:

"It all comes down to Friday's non-farm payrolls report.  Payrolls probably need to exceed 200k for USD/JPY to see any meaningful rise above 100 and for 10-year bond yields to break 3% and hold those gains.
 

"Beating the market's 180k forecast may not be easy as 200k jobs would be the strongest level of payroll growth since February.  At the same time, other reports related to the labor market have been mixed.  

"If payrolls fall short of last month's 162k increase and/or the unemployment rate rises, USD/JPY and U.S. yields could reject their key levels quickly."

Losses in USD/JPY will certainly fuel gains in the GBP/USD cross.

But, just how much upside potential does GBP have?

We have a new long term exchange rate outlook note in from UniCredit Bank.

Analysts, lead by Vasileios Gkionakis, say they believe GBP upside is limited:  

"Recently released very favorable British economic data, particularly the three important PMI readings (manufacturing, service and construction), have provided sterling with strong appeal.

"Markets seem to be far from considering another economic stimulus by the BoE. The very reverse is currently on the radar: money markets are already starting to anticipate a first rate hike for autumn next year, as can be derived from 3M sterling Libor futures and SONIA rates.

"As long as this optimism persists and continues to be supported by strong real data, neither the USD nor the EUR should be expected to regain much of the lost ground.

"On the other hand, there are still some data of concern, such as consumer credit and lending secured on dwellings, as well as structural stress factors like Britain's current account deficit, which will very likely prevent investors from becoming too optimistic.

"In summary, we dare say that that GBP does not seem to have meaningful upside potential.

"Regarding cable and EUR-GBP, this would correspond to limits at around 0.8360 and 1.5750, respectively."