British Pound to Dollar Rate Still on Course for 1.62 Maximum

A new technical forecast regarding the pound to dollar exchange rate from a leading international payments broker suggests GBPUSD could peak at 1.62 before US dollar buying interest reasserts itself.

For now though the GBP/USD retains an upward bias with the dollar continuing to fall despite improving US data as a dovish FOMC event overwhelmed markets in mid-June.

We see a great deal of negative-USD interest on the markets with Bank of America proprietary flows showing both hedge funds and real money selling USD against EUR, JPY and GBP in the week ending on June 19.

Hedge funds have been selling USD in the last four weeks, while real money has been selling USD for the last two weeks.

CFTC data - which gives an oversight on how the all-important speculative market is betting - shows the largest level of USD selling in two years.

This selling pressure has coincided with buying interest in the pound sterling as UK data improves from a slow start to 2015 – we have since seen the pound to dollar exchange rate rally back above 1.5800 after hitting a year low at 1.4566 in mid-April.

While the longer-term trend favours the USD complex we believe that the extension of the present rally in the pound dollar conversion could continue.

“Despite being corrective in macro terms recent Sterling gains appear capable of further near-term strength with prices remaining well supported for now at least,” says Lucy Lillicrap, FX risk management solutions at AFEX.

AFEX technical research suggests dips now have support at 1.5650 then 1.5500 and unless this lower demand point gives way no obvious interim high will be confirmed (thus preventing any sell-off back towards the early June 1.5175 lows as well).

“Instead focus is still on 1.6000 at present and while any breach of this level should prove untenable from an intermediate perspective potential is apparent nearer to 1.6200 thereafter before major resistance emerges again,” says Lillicrap.

Those hoping for 1.60 should speak to their independent FX provider to set up a buy order.

Has the British Pound Peaked?

The pound sterling currently has a RSI reading at 73 – the RSI (Relative Strength Index) is used by technical observers to ascertain where momentum lies. Any reading above 70 is judged to be a potential indicator that a trend may be overbought.

A pullback is therefore necessary to stabilise prices, as such the necessary technical conditions for a pullback and stabilisation in the pound dollar rate does exist.

However there are a host of other technical indicators that are advocating for further advances with the the currency pair now above its 20, 50 and 100 day moving averages.

But what about the fundamentals?

For the British pound the decision to raise interest rates at the Bank of England will be key – interest rate levels remain the single most important driver of currencies at the present time and the pound’s progress will depend on how confident the Bank of England is over the strength of the economy.

Inflation is one economic reading that will however need to pick up before the Bank of England embarks on pro-sterling interest rates rises.

UK official inflation rose in May, by a mere 0.1%y/y in June which reverses the 0.1% fall in the year to April.

Food, petrol and utility bills remain lower than this time last year, helping cash spread that little but further.

Inflation will probably begin to rise later in the year but for now it remains low.

Inflation might be a rounding error away from zero but the Bank of England’s Monetary Policy Committee all agreed that no change in policy was needed in June.

Stephen Boyle Chief Economist at RBS has told us that he believes a low inflationary outlook will keep the decision makers at the Bank of England sanguine:

“On their analysis inflation would be 1.5% higher were it not for the falling prices of food, energy and imported goods. They expect these effects to be transitory and for inflation to swing upwards at the end of the year.

“But it’s far from straightforward.

“The MPC expected consumers to spend more of the windfall from lower inflation, but at the moment they’re not doing quite as much as thought. That suggests the Bank is getting a little less confident about the UK’s growth for the rest of this year.”

A ‘less confident’ Bank is not a Bank that would consider a 2015 interest rate hike and we see this as a key risk to the pound’s present rally against the dollar.

Splitting Payments

If we combine this balanced fundamental view from RBS with the technical observation that the GBP-USD could be overbought then we begin to see the conditions for the exchange rate to be at a potential maximum.

We would therefore suggest that current levels are certainly advantageous for those with dollar payments to act on.

Those who fancy the AFEX forecast for 1.62 could split their payments by dealing 50% of their requirements at current spot levels and placing an order on 1.62 for the remaining 50%.