GBP/USD Back in Late 1.40's by Year-End say Lloyds, Consolidation Expected to Continue Today

The GBP to USD conversion is forecast to trend higher, particularly in the second half of the year, according to the latest batch of exchange rate forecasts from Lloyds Bank.

• Pound to dollar exchange rate managing to keep head above 1.4200 at present, more consolidation expected
• Gradual recovery seen by Lloyds Bank but support from interest rates will tepid, limiting strength
• Assumption made by analysts that the UK will vote to remain in EU

It has been a volatile few weeks for sterling which have seen the currency plug fresh seven-year lows against the US dollar as uncertainty around UK membership of the European Union (EU) intensified.

Most analysts now agree that the pound is trading below where it would normally be were it following the fundamentals dictated by the economy and interest rates.

The gravity of Brexit has lead to speculation amongst some analysts the the GBP/USD could continue moving lower to levels not seen since the 1980s.

The pound's worst level of the year was recorded 1.3835.

However, markets soon found their feet again, and as Sean Lee at Forextell observes, “the market got way ahead of itself and started getting overly bearish at the wrong levels. I expect to see 1.48 in coming weeks and then we may see some equilibrium return to the market.”

Lloyds Bank say they believe the GBP to USD conversion has formed a base following the extended period of decline.

Lloyds have made the call in the latest edition of their monthly International Financial Outlook publication and say the British pound will recover back to the late 1.40's by year-end

The calls resonate with the forecasts for the sterling-dollar pair made by the world’s top 45 foreign exchange forecasters which puts the lower limit for sterling losses at 1.40.

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The subsequent recovery back above 1.40 has Lloyds, and others, saying the worst in the trend lower has passed.

However, the assumption made by all forecasters we follow is that the UK will remain a member of the European Union following the June vote.

As such forecasts are based on this higher-probability outcome. The outcome of the vote, while favouring the Stay camp for now, is not certain.

No doubt this outcome is the big unknown for forecasters such as Lloyds and the key risk to the forecasts.

Bank of England to Raise Interest Rates in Nov 2017

Brexit aside, the pound is really struggling with monetary policy expectations and the fact that the Bank of England never actually delivers on that promised interest rate rise.

Ultimately currency values are determined by base interest rates and if we cut through the noise of Brexit we can see that moves at the Bank of England will continue to matter a great deal.  

According to forward money market rates, there is a 30% chance of a 25bp cut to the UK base rate this year, while the first 25bp hike is not fully priced-in until Q4 2019.

In recent testimony to the Treasury Select Committee, Governor Carney’s comments carried a more dovish tone, with further policy easing not ruled out.

This is countered by a number of other MPC members suggested that rates markets may have gone too far in overly discounting the possibility of a hike.

"Nevertheless, we have pushed out our forecast for the first rise in UK Bank Rate to November 2017," say Lloyds.

Ultimately though, even with such subdued interest rate expectations fair-value for the pound is higher than where it is seen at present.

Lloyds’ forecast for a stronger pound rest with the view sterling is now oversold and the UK will vote to stay in the EU.

“The UK growth and inflation profiles remain subdued, but given the magnitude and velocity of the decline in GBP since November, we feel that GBP/USD has now formed a base,” say Lloyds.

Beyond the uncertainty in the coming quarters, the pair should rally back toward fair-value of 1.47 by end-2016.

GBP/USD Could Extend to 1.44 in the Near-Term

The recent recovery in sterling-dollar could run further argue analysts who have been watching the pair at UOB in Singapore.

"While the short-term upward momentum has clearly eased, it is too early to expect a mid-term top. The current movement is likely part of a consolidation  phase and as long as 1.4050 is intact, another attempt to move higher to test the major 1.4400 resistance cannot be ruled out just yet," say UOB in a briefing to clients.

However, the immediate term is expected to deliver more of the same, "the consolidation phase appears incomplete and further range trading is expected for today. Only clear break out of the expected 1.4150/1.4280 range would lead to a more sustained move," say UOB.