GBP/USD: UniCredit Forecast GBPUSD Hit 1.57 as Inflation Comes to the Rescue
- Written by: Gary Howes
The British pound is in real danger of breaking below 1.50 against the US dollar but 2016 is forecast to favour sterling say UniCredit.
Words from senior Bank of England figures appears to have pulled the rug from below sterling; both the Bank's Haldane and Carney have warned that markets should not expect an interest rate rise in the opening months of 2016.
"Recent developments have been negative for the pound and at this stage the 1.50 level in GBP/USD is looking dangerously vulnerable," says Kathy Lien, BK Asset Management's Director, in response to recent developments.
Nevertheless, while the GBP to USD conversion has settled into a sideways/downwards channel over the last 5 months but sterling has outperformed most G10 currencies against the USD over the past two weeks, rising modestly against the greenback.
These rises are actually an impressive feat ensuring pound sterling has been the big outperformer during the latest USD rally which has been in place since mid-October.
Regardless, a substantial portion of the speculative market will be happy to sell any GBPUSD strength and stunt any significant moves higher.
At the same time sellers are not brave enough to put too much pressure on sterling and GBP-USD seems to have found a floor around 1.52 from where it can spring higher.
A dogged resistance against the US dollar’s strength could well turn into a sustained break higher should the US dollar stumble.
“We expect material upside in cable over the medium term,” say UniCredit Bank who are forecasting the GBP-USD exchange rate to move well above current levels in coming sessions.
However, a catalyst is needed to prompt significant upside moves concedes UniCredit’s FX strategist Kathrin Goretzki in London.
In the eyes of UniCredit there are three potential catalysts to that GBP outperformance:
1. The BoE turning less dovish.
2. The market starting to realize the mispricing of the lift-off gap (between the Fed and the BoE) and its consequent complacency on the pricing of the BoE hiking cycle.
3. Data (and more importantly inflation) surprising on the upside.
It is point number three that is likely to signal a sharply stronger GBP it is argued:
“As we move into 2016 and the negative base effects in headline inflation fade (unless, of course, oil keeps plummeting), inflation will pick up sharply. Wage growth effects will then start to surface, setting the stage for an earlier BoE lift-off than is currently priced in,” says Goretzki.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3346▲ + 0.14%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2892 - 1.2945 |
**Independent Specialist | 1.3159 - 1.3212 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
UniCredit stick to their 1.57 for GBP-USD by year-end, but concede risks are to the downside and stem from dollar momentum – unless the market realizes sooner the complacency about the BoE tightening cycle.
The GBPUSD forecast for 1.57 is certainly above consensus when compared to other projections, but the important thing we fell is no so much the final number, but the overall balance of probabilities.
The balance of probabilities in UniCredit’s view is that the pound to dollar exchange rate should move materially higher as expectations on relative interest rates in the US and UK shift, something that HSBC’s David Bloom agrees with.
In fact, Bloom says the ‘big theme’ for 2016 will be that of US dollar weakness as markets realise that the upward trajectory of US interest rates is not as steep as current rises in the USD suggests.
UniCredit forecast the GBP to USD conversion to reach 1.60 by mid-2016 and 1.63 by the end of the year.
It must be pointed out though that there will remain a substantial interest in selling the British pound whenever it strengthens notably against the US dollar.
The US Federal Reserve is forecast to raise interest rates in December and markets will likely retain their current ‘buy USD’ settings until the event has passed and more clarity on future decision-making at the Fed is made clear.
But there could be a big change ahead if UniCredit and HSBC are correct in their stances.
