GBP/USD Conversion: A Recovery is Now Due
IG have made backing a recovery in the pound to dollar exchange rate a key trade for the week ahead - here are the reasons why.
The call for a pound sterling recovery should come as no surprise as the UK currency historically finds buying interest at current levels.
IG analyst Chris Beauchamp says despite near-term volatility he is backing a recovery in the GBP/USD.
Selling pressures have tended to stall at 1.52 with 1.5170 noted as a major support zone that has proven its dependiability over recent times.
Beauchamp says if the pound stays above 1.52 a move higher towards, "1.5360 as a starting point," as buyers will continue to come "into the fray" above this support zone.
Seven trading days have now past without a rally for the British pound versus the U.S. dollar.
Long stretches of weakness or strength for the currency pair are not unusual argues Kathy Lien, Managing Director at BK Asset Management.
In late August for example, GBP/USD fell for 9 days straight before bottoming. "In mid June, it rallied for the same number of days before reversing strongly. When GBP/USD turns, the move is strong and can range from 200 to 800 pips," says Lien.
However, Lucy Lillicrap at AFEX argues that the negative bias for the sterling dollar rate is likely to remain in place:
"Over the past few days Sterling has come under pressure again, following a corrective looking rebound since April, and while GBP prices may yet be able to re-stabilise previous notable lows around 1.4565 nonetheless look vulnerable to attack again at some point."
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.
Big Week for the US Dollar
The dollar closed last week on the rise, helped by the statements made by Yellen, but the market is now waiting for fresh data.
This will be an important week on this front, as the October Employment Report will be published on Friday with labour market data expected to prove positive.
A further improvement remains a necessary condition to hike rates which Fed Chair Yellen has confirmed will take place in 2015.
Therefore the dollar should consolidate on the progress made in the past few sessions, should data prove favourable.
RBS: The Long-Term Picture is Positive
It is worth considering that the longer-term uptrend in the British pound remains alive, thanks to the robustness of the UK economy.
It is easy to forget this when looking at the near-term volatility that the currency markets are famous for.
When trading long-term it is however important to remember that the outlook remains firmly pro-GBP.
"The UK is enjoying its third-longest run of growth since the 1950s. 350,000 more people are in work today than a year ago. Unemployment is close to pre-recession levels. Real wages are rising. Corporate profits are as strong as at any time since the 1990s, at least outside of oil and gas," says Stephen Boyle Chief Economist at RBS.
Business investment has been growing pretty consistently for more than five years.
"And all this without the slightest hint of inflation. We've rarely had it so good," says Boyle.
Are there reasons to be fearful?
"If UK history is a decent guide to the future, we’re closer to the next recession than the last one. The greatest risks to the UK lie overseas. A still-fragile Eurozone economy relies on quantitative easing for the little growth it can muster," notes Boyle.
China’s slowdown is apparent in weak trade flows and lower commodity prices.
These are already “priced in” to the RBS view that UK growth will be a little slower in 2016.
"But recession – the one thing economists are notoriously bad at spotting – is unlikely," argues Boyle.
