Pound Could Fall Below 1.50 Against the US Dollar

The pound to dollar exchange rate (GBPUSD) is likely to continue falling suggests research - but Thursday's big event could change the game.

For the US dollar exchange rate complex the decision on whether or not to start raising interest rates is critical.

Can the cyclical bull-run in the USD continue? Without doubt, if more dollar gains are to be realised the Fed will have to start raising interest rates soon.

For the pound to dollar exchange rate (GBPUSD) the ability to strengthen from here will only be likely should the Fed opt not to raise interest rates.

Should this be the case then we would forecast a move back to 1.57 in the near-term.

Indeed, with stock markets tumbling and emerging market currencies under pressure in recent weeks, market expectations of the Fed hiking have cooled.

However, the futures markets are still pricing in a one-in-three chance of a hike.

“That’s down from 50:50 before the China crisis, but still means the door has by no means shut on September seeing the first Fed rate hike since 2006, fuelling speculation about the potential impact of tighter policy and a stronger US dollar on global markets,” note Swissquote Bank in a note to clients.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3344▲ + 0.14% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2891 - 1.2944
**Independent Specialist	1.3157 - 1.3211 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Downside Risks to the Exchange Rate

According to technical analyst Karen Jones at Commerzbank in London the outlook favours the USD base on recent trading patterns.

GBP/USD is struggling to clear the 20 day ma at 1.5450 near term which confirms momentum is in short supply.

"Currently we view the market as bid while above the 200 day ma at 1.5350. The intraday Elliott wave count is now more positive and the risk has increased for near term strength. Above lies 1.5530 (55 day ma), the 1.5615 August high and the 1.58175 recent high. Currently a rally to 1.5540-1.5615 would be allowed for," says Jones.

Commerzbank's longer term outlook is bearish and below 1.5340 will retarget 1.5172, the June low. Failure here will trigger losses to retracement then 1.4895, the 78.6% retracement.

Oversold near-term readings would argue some relative stability is possible here initially but given the absence of an obvious base or reversal pattern fresh GBP strength will probably prove unsustainable suggests Lucy Lillicrap at foreign exchange brokers AFEX.

“Thus, even if an extension below the psychological 1.5000 level is delayed for several more days, downside risk predominates from an intermediate perspective,” says Lillicrap.

Update: Intesa Sanpaolo forecast eventual return to 1.60.

Uncertainty Ahead for USD Complex

So how should those watching the pound / dollar market position themselves?

“From my own perspective I would not be surprised to see a rate hike, and, ahead of the announcement I will be establishing some very small long USD positions from which, I can add to or just chop,” says professional trader Sean Lee at Forextell.

Lee also cautions that there could well be an initial knee-jerk reaction to the news will we see the usual “Buy the rumour / Sell the news” event.

“I know that the potential rate hike gives us divergent central bank policies but so much of this must have been baked in by now and the true effect of the divergence may take a day or two to sink in and work its way through,” says Lee.

Lee will not be leaping for joy with a full size long USD position immediately if the FOMC raises rates.

“I will not be celebrating with balloons in my office and my feet in buckets of sand under the desk drinking Pina Coladas with umbrellas until I have seen confirmation of the USD move. So I would suggest caution,” says Lee.

The market now assigns just a 30% probability to a September rate hike, while professional economists are split almost precisely 50-50.

Therefore the potential for a USD rally on the back of a rate rise has grown significantly.

Economic data has been more than supportive, but some measures of inflation expectations are now flirting with their lowest levels since the financial crisis and expected financial market volatility is now unusually high.

Neither of these are conditions that have historically supported a rising policy rate.

“We still believe the Fed is likely to raise rates before the end of the year. While the Fed is now shying away from explicit forward guidance about the timing of future policy decisions, it should at least leave the door clearly open to tightening later in the year, thus constituting a “hawkish pause” rather than a “dovish pause,” says a note on the matter from RBC Capital Markets.

Charts Confirm Weakness Ahead

As mentioned, near-term declines are possible - a scenario confirmed by the technical charts.

"GBP/USD has failed to clear the 20 day ma at 1.5428 near term and started to erode the 200 day ma at 1.5346. The intraday Elliott wave count is showing conflicting signals but we will assume that the market is now of the defensive. Below 1.5325 will target 1.5172 the June low. Failure here will trigger losses to 1.5088, the 61.8% retracement then 1.4895, the 78.6% retracement," says technical strategist Karen Jones with Commerzbank in London.

Above the 1.5475 recent high lies 1.5519 (55 day ma), the 1.5615 August high and the 1.58175 recent high are possible suggests Jones.

Currently Commerzbank would expect upside probes to remain limited to 1.5540-1.5615 would be allowed for.