GBP/USD 3 Month Forecast: 1.36 Target as "Substantial Downside Risks Remain"
The GBP to USD conversion remains exposed to growing downside risks in 2016 say Lloyds Banking Group while technical analysis from France's Societe Generale tells us where the next downside targets lie.
There of course could be sharp recoveries in the pound to dollar exchange rate, for instance should the Bank of England be a little more optimistic than markets are expecting at Thursday’s MPC decision meeting.
(In fact, we see a high chance of a GBP rally).
Nevertheless, when looking at the bigger picture we would have to assume that any strength in the GBP to USD pair will be short-lived.
Why is this?
Look at the chart below, supplied by the technical analysis team at Societe Generale:
“GBP/USD confirmed a H&S recently and has now breached last April lows (1.45). Multi-month trend resistance at 1.53 will now be a key hurdle,” says Stéphanie Aymes, Head of Technical Analysis at Societe Generale.
According to Aymes the undercurrent driving GBP/USD remains weak and eventually the downtrend is expected to persist towards 2010 lows of 1.42 and even towards graphical levels of 1.36/1.35.
Soc Gen have a target range, based on the charts, of between 1.36 and 1.42 in three months.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.335▲ + 0.18%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2896 - 1.295 |
**Independent Specialist | 1.3163 - 1.3217 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Fundamentals Also Warn of Downside
Be aware that while the charts tell us one thing, fundementals could point in another direction.
Unfortunately for those hoping for a better rate on their US dollar purchases, this does not look to be the case for GBPUSD.
With this in mind we consider the exchange rate forecasts from Lloyds Banking Group issued at the start of the year.
"Substantial downside risks remain, with GBP/USD hovering precariously close to key support and next month’s BoE Inflation Report and EU negotiations potential flashpoints. We target a move to 1.47 by end Q1, before a renewed pull back to, and possibly below, 1.45 later in the year," say Lloyds.
Domestically, downward revisions to UK GDP growth for Q2 and Q3 last year and the weakness of inflation have led to a further scaling back in UK interest rate rise expectations.
Judging by forward money market rates, the market now expects the MPC to keep Bank Rate at 0.5% throughout this year.
"On top of this, rising EU risk premia has dented sterling sentiment, with recent comments by PM Cameron focusing market attention on the possibility of a 2016 EU referendum," say Lloyds.
In fact Brexit remains the key surprise for sterling in 2016. The question must be asked though has this not already been priced into the current value of sterling?
One could argue a good portion has already been priced in as opinion surveys show an increasing appetite amongst the British public to exit Europe.
That said, the actual FX shock of an exit vote could be substantial.
Commonwealth Bank Lower GBP to USD Forecast Profile
Adding to the negative fundamental tone on sterling-dollar are Commonwealth Bank.
“We have revised down our GBP/USD forecast profile. We now expect the first Bank of England (BoE) rate hike in November 2016. This is somewhat later than our previous assessment that the tightening cycle will begin in May 2016,” says an exchange rate forecast note from analysts at the bank.
Slower U.K. growth momentum, combined with downward revisions to historical U.K. GDP growth are blamed.
Also of concern to Commonwealth Bank, as it is to many other institutional analysts, is the EU referendum:
“Given the political uncertainty over the outcome of the referendum, participants are pricing in a greater risk premium into GBP-denominated assets, and marking the exchange rate lower. This was the same pattern observed in the lead-up to the 2014 Scottish referendum and 2015 U.K. general election.”
