Pound Heads to Best Exchange Rate of 2016 Against US Dollar
- Written by: Gary Howes
Above: Mark Carney, Governor, at the Bank of England Open Forum, Guildhall, London. Pic: Bank of England.
Pound sterling looks intent on extending its recovery towards levels not seen at the start of the year.
The British pound may be lower against the euro heading into the new month, but against the dollar further advances are being realised.
The pound to dollar rate was seen trading at 1.4657 ahead of the close of the London market session; levels that are close to sterling’s 2016 best against the dollar at 1.48.
The catalyst for the most recent moves in the currency pair is certainly fresh dollar weakness which was noted after the release of a much-watched gauge of US consumer sentiment - the Michigan Consumer Sentiment index - which gave a below-expectation reading of 89 for April.
Economists and markets were expecting a reading of 90.
The data comes a day after the release of below-consensus US GDP data and paints a picture of a US economy that is certainly seeing its rate of growth slow. With economic data edging lower can the US Fed justify raising rates in 2016?
The fear amongst traders is that it can’t.
A fresh impulse of British pound buying was meanwhile prompted by Bank of England Governor Carney who notes that while the U.K. economy appears to be slowing in the very short term, it continues to offer solid growth while wages are expected to pick up.
Higher wages should ultimately lead to higher inflation which is a key economic variable the Bank could seek to target with higher interest rates.
And the promise of higher UK interest rates coming out of the Bank of England = increased demand for sterling.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3347▲ + 0.15%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2893 - 1.2946 |
**Independent Specialist | 1.316 - 1.3213 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Brexit? What Brexit?
The pound sterling has been an underperformed for much of 2016 owing to concerns posed by expectations for an UK exit from the European Union at the March 23rd referendum.
Softening activity indicators and the moderation in quarterly GDP growth from 0.6% in Q4 to 0.4% in Q1 have fuelled a number of warnings, notably from Chancellor George Osborne and the OECD, that the threat of leaving the EU has been weighing on economic activity.
However, of late the pound has rallied as markets realise that they may have been overly pessimistic on both sterling and the UK economy.
“But it is hard to find concrete evidence that the looming EU referendum is having a big adverse impact,” says Ruth Miller at Capital Economics.
In its report on the economic consequences of a Brexit last week, the OECD pointed to businesses starting “to defer investment projects, with UK business investment declining by 2% in Q4 2015.”
“However, this is potentially misleading as business investment figures are notoriously volatile from quarter to quarter,” says Miller, “what’s more, almost half of the fall in business investment in Q4 was due to the mining and quarrying sector, which probably just reflected the fall in oil prices.”
The next set of investment figures for Q1 only come out on the 26th May, however, survey indicators do not suggest that firms are generally putting investment projects on hold either.
Has the GBP’s Limit Been Reached?
The big question we have been preoccupied with of late is the extent to which the pound can continue its recovery.
Against the euro we are certainly seeing signs that further strength will be hard to come by, based on the currency pair’s obsession with technical considerations.
We have also heard from TD Securities why those with US dollar payments should be prepared to suffer massive declines if they wait to long.
TD warn of a decline in the pound / dollar rate to 1.35.
That said, the dollar is looking vulnerable at the present and while the prospect of a deep decline in GBP/USD is indeed possible, the pound could yet advance.
The GBP/USD is likely to outperform the EUR/USD purely on a technical basis in the short term.
A major consolidation break-out above the 1.4400 area advocates for a further ascent towards 1.5000 and then on to 1.5250 levels in a short space of time.
There remains further room for short covering and a lot of people are on the wrong side of this market.
