British GBP/USD Rate's 2016 Forecasts Downgraded @ ANZ
The pound sterling has scuppered recent gains and is now at risk of resuming its downtrend, in line with analyst forecasts for a notably lower exchange rate through the 2016 period.
The GBP to USD conversion has fallen from an October best at 1.5380 to the current levels around 1.5270 - the move opens up the prospect of a resumption of the longer-term downtrend which could take the GBPUSD below 1.50 according to ANZ Bank.
The release of inflation data on the 13th of October has dealt a blow to those hoping for a stronger pound sterling exchange rate.
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.
We would look for 1.54 to form the barrier to the upside - below this pivot point we look for declines towards 1.52 and then 1.51 in extension.
ANZ Research Lower Pound v Dollar Forecasts Longer-Term
Looking at the longer-term picture it is the Bank of England that will likely hold sway over the British pound.
We have heard from analysts at ANZ Research who have told clients they are lowering their long-term forecasts on the British pound to dollar exchange rate:
"In the current (low) inflation environment, BoE Governor Carney’s continued insistence that the Bank will be consider rate hikes in the near future sounds increasingly hollow.
"We see GBP as a mid-pack performer in a broad USD rally through 2016. We are also wary of a referendum on EU membership by end-2017."
ANZ's near-term GBP forecasts are largely unchanged, but the mid-2017 forecast lowered to 1.42 from 1.54 confirming the present longer-term trend lower is likely to ultimately stay with us for months to come.
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.
US Dollar to be Supported by US Fed Policy
While the Bank of England will determine British pound direction the same can be said for the US dollar which has the US Federal Reserve to rely on.
Early October has seen a number of key FOMC members (eg Lockhart, Dudley and Fischer) reaffirm that their base case scenario was for the Fed to begin raising rates by the end of 2015.
However, a high degree of uncertainty surrounds these expectations.
Indeed, for the Fed to hike rates in 2015 ANZ Research argue that a number of pieces need to fall into place including: robust domestic dataflow to give the Fed confidence that inflation will return to 2%; a stabilisation in EM; and a reduction in financial market volatility.
The focus this week will be retail sales and CPI data.
The outlook for the dollar exchange rate complex therefore remains dependent on upcoming data events and unless we get some spectacular upside surprises the pound sterling could continue to hold the near-term advantage.
Sterling Hit by Inflation Data
Sterling fell by 1% against the dollar and the euro this morning, reaching its lowest level against the euro since May as figures showed headline inflation turned negative again last month.
The continued lack of price pressures is good for the consumer but no doubt not helping those who are looking for higher exchange rates from which to sell sterling.
It seems the majority of the downside pressure on prices is coming from low energy and food prices which makes a rate hike from the Bank of England harder to justify.
“Sterling continues to look a little vulnerable against the ‘comeback’ euro and having breached 1.3450, looks set for a test back below 1.30 in the months ahead. Last week, news that the trade deficit had grown to over £11bn in August demonstrates that we are still importing too much and exporting too little. One of the big influencers on trade is the value of the domestic currency and the fact that sterling is now dealing 10 cents lower against the euro than in July, will come as a welcome relief to the exporters," notes Chris Towner, chief economist at HiFX.
Wage Data Ahead
The answer to the question of whether GBP/USD peaked lies in today's labour market report.
"If wage growth accelerates like economists predict, sterling could bounce off today's lows and head back towards 1.54,” says Kathy Lien at BK Asset Management.
However if jobless claims spike or weekly earnings slow, Lien says it would be a nail in the coffin for pound.
“Technically support in GBP/USD is at the September low of 1.5110,” says Lien.
