GBP/USD Exchange Rate: Dreams of 1.55 Torpedoed by Inflation Shocker
The pound sterling to US dollar exchange rate (GBPUSD) still has the potential to add to its recent strength say UniCredit Bank.
The pound has decline against the US dollar as the pair's rally comes to a dramatic end following some soft inflation data out of the UK.
Central bank policy remains the driving forced behind the GBP/USD exchange rate and inflation data remains a key driver of that policy.
UK inflation has fallen into negative territory with the -0.1% coming in below forecasts for a reading of 0%. This tells currency markets that the pressure to raise interest rates at the Bank of England have receded even further.
Expectations for higher interest rates are the oxygen required for stronger sterling exchange rates.
The sudden reversal in the pound to dollar exchange rate from just below the 1.54 area creates the technical signal that the period of strength is over.
UniCredit: The Pound v Dollar Should be Higher
October has thus far proven a tough run for those corporates and individuals hoping for a stronger British pound from which to make international payments.
Data has been good but the lack of consensus-beating numbers has lead currency players to take a negative view on the currency with losses coming against the euro and commodity dollars.
The pound to dollar exchange rate (GBPUSD) has however been one bright spot having advanced from the early October lows at 1.51 to above 1.53.
1.54 looks like an immediate short-term target based on underlying momentum at the start of the new week.
UniCredit Bank have confirmed to clients that they are forecasting further British pound strength over coming weeks and do not see weak upcoming UK inflation numbers as standing in the way.
A number of factors are likely to have pushed headline inflation negative in September, while the core CPI is set to remain flat at 1.0%.
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.
However, pay growth will likely accelerate faster than expected by consensus.
“Based on the ongoing tightening in the UK labour market, we expect the BoE to adopt a less dovish stance sooner than the market anticipates,” say UniCredit laying their foundation for an expected GBPUSD appreciation.
However, UniCredit acknowledge that downside risks to their year-end forecast of 1.63 have increased due to the disappointing services PMI this week and the still relative dovish stance by the BoE.
“That said, the historical relationship between GBP-USD and UK-US 2Y swap differentials suggests the currency should be trading around 1.55 now,” forecast UniCredit.
The Italian bank expects to see a correction of this misalignment over the coming weeks – but price swings may be of reference; “hence, we have decided to increase our stop-loss of our long GBP-USD trade recommendation to below entry (1.5220),” say UniCredit.
Swissquote: “We Remain Constructive on the GBP”
Also sounding a more bullish tone on the pound sterling are Swissquote Bank who cite a solid UK economic profile.
"With UK economy moving forward at a reasonable pace (balanced by strong industrial production but weak PMI service data) and tight labor markets already generating wage growth we should see steady transmission into inflation,” say Swissquote.
In addition, the weaker GBP should ease BoE members concerns over importing deflation.
“We remain constructive on the GBP in the current environment, anticipating that incoming information will pull in expectations for a rate hike. On the data front, CPI and labor statistics will be significant,” says a note from the bank based in Gland, Switzerland.
Strategically, Swissquote say GBPUSD bullish momentum should continue after clearing 200d MA at 1.5330.
“Traders immediate focus will be on 1.5367 (09/23/2015 high) before uptrend extension to 1.5659 (09/18/2015 reaction high),” reads a note to clients.
