Pound Must Break 1.55 Barrier Against Dollar, BoE Thursday and Non-Farm Payrolls Ahead
- Written by: Gary Howes
The Bank of England's meeting on Thursday, US employment figures on Friday and the technical barrier at 1.55 should set the tone for the pound to dollar conversion in November.
At the start of the first week of November the pound to dollar exchange rate (GBPUSD) was seen trading higher around the 1.5460 level following some strong data from the UK manufacturing sector.
While sterling received a boost on news UK manufacturing is picking up again we expect the impact of the data to ultimately be limited; manufacturing represents a small sliver of the UK economic pie.
What then will matter for the GBP / USD over coming days?
The Bank of England's Thursday meeting dominates the fundamental outlook for the British pound, but ahead of this there is the little bug-bear that is the 1.55 level.
"For the UK, Thursday’s BoE meeting takes centre stage. Market pricing reflecting heightened expectations that the US will hike in December, has inadvertently brought forward expectations of a BoE hike. This resulted in GBPUSD being well supported," note Lloyds Bank in a client note at the commencement of the new month.
Steling / dollar held 1.5240/50 on multiple occasions last week and has rallied aggressively since, now trading 1.5445 - well beyond its pre-FOMC level of 1.5340.
"It will initially head into resistance at 1.5510/45 and subsequently the Fib level at 1.5620; support is at 1.5250 and then 1.5195, but expect price action to be limited until the BoE on Thursday," say Lloyds.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3342▲ + 0.12%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2889 - 1.2942 |
**Independent Specialist | 1.3155 - 1.3209 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Richard Perry, Market Analyst at Hantec Markets agrees that the outlook for this exchange rate depends on the ability to advance beyond 1.55:
"The sharp rally on Friday has certainly significantly improved the outlook, but taking a step back and looking across the last couple of months, nothing has yet been achieved. A strong bull candle may have broken the initial resistance but $1.5510 remains intact and this is the key overhead barrier on a medium term basis."
There are however doubts as to whether GBP/USD can advance further.
2015 has been a story of range-bound trade; the conversion has traded in between 1.55 and 1.50 - the question is whether or not there has been a fundamental shift in circumstances that warrants a break out of this range.
Evidence of a potential waning upside bias is provided by the GBP to USD chart's RSI which, "has consistently failed up around the 60 level and this is another barrier. The improvement has come in the Stochastics though which have ticked higher," says Perry.
We think not - any moves above 1.55 are ultimately likely to be futile unless we get some concrete evidence from the Bank of England that they are moving towards raising interest rates.
Should more than one member of the committee vote for an interest rate rise then the pound could be in with a change to advance above 1.55.
Our stance on sterling dollar is therefore one of caution and we would hestitate to chase the exchange rate higher.
US Data Will be Important, Non-Farm Payrolls Dominate
While we watch for signs on interest rate rises at the Thursday Bank of England meeting it is also noting that the US side of the equation will matter.
Incoming US economic data bear significance for the December FOMC decision and could lead to higher FX and rates volatility.
"We expect a moderate improvement in US labor market conditions (+175K for payrolls and 5.0% for the unemployment rate), consistent with our expectation of a March lift-off," says Dennis Tan, analyst with Barclays in Singapore.
Markets are presently pricing in a reading of 182K.
A strong NFP surprise would further fuel the USD rally, with the euro likely bearing the brunt, given the diverging policy outlook.
The pound should see downside limited as a strong reading here ultimately feeds into a more bullish stance on UK interest rates.
