GBP/USD Rate Shifts Lower at Start of June But Outlook Evenly Poised

The dollar is in control on the eve of the new month and they big question facing currency watchers is whether June will be as kind to the USD as was May.

• “There is a strength to sterling now that suggests that the bulls are more resilient.” - Richard Perry @ Hantec Markets
• “For now, the long-term trend remains down for the dollar against all the majors.” - Phil Seaton @ LS Trader
• “Intra-day studies remain bearish suggesting this latest rally phase towards 1.48 can see a deeper correction.” - Robin Wilkin at Lloyds Bank.

The British pound has suffered a turbulent start to the new month with markets being reminded the the June 23rd referendum on future membership of the European Union remains a source of uncertainty.

The GBP/USD has slumped from the week's opening level of 1.4665 to register 1.4496 at the time of writing.

The pound fell by a mere percent in May confirming both currencies are however evenly poised.

The dollar is demand across the board with the currency continuing to enjoy demand stemming from US Federal Reserve Chair Yellen’s comments made at Harvard University on May 27 in which she noted that a rate rise may be appropriate “in coming months.”

“It’s appropriate — and I’ve said this in the past — I think, for the Fed to gradually and cautiously increase our overnight interest rate over time. And probably in the coming months, such a move would be appropriate,” remarked Yellen.

Yellen, speaking at the Radcliffe Institute for Advanced Study’s annual post-Commencement gathering, did however add that the hike is dependent on whether the economy keeps improving.

As a result, this Friday’s US labour market data will be keenly anticipated by foreign exchange traders.

The dollar trades towards a nine week high on a trade weighted basis while the GBP to USD conversion trades at 1.4586, the highest rate reached by GBP/USD over the past five days was at 1.4740 and we note near-term momentum appears to be in the dollar’s favour.

“The dollar’s continued recovery continues to suggest that the low printed on the 3rd May on the dollar index was a key reversal low, and that price will continue to grind higher. The dollar index is now holding above the 5-day moving averaged may test the 200-day, currently at 96.07 this week. The RSI is also testing the 60 level on the RSI. A decisive move through this level would also indicate further strength. For now, the long-term trend remains down for the dollar against all the majors,” says Phil Seaton at LS Trader.

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US Payroll Data Looms

With the Fed remaining in ‘data dependent’ mode it goes without saying that Friday’s release of non-farm payroll data will be keenly anticipated. A strong showing here will certainly stoke expectations for a June/July interest rate rise which should keep the dollar bulls running.

But, what data to expect?

Market consensus is for a figure of 161K people to have found work in May, up from the previous month’s 160K and the US unemployment rate is forecast to fall to 4.9% from 5%.

Average Hourly Earnings will also be a big driver with a forecast 0.2% increase expected.

“At this point, wages are likely to bear the most importance and a number close to 2.5% should be enough for the Fed to proceed with a rate hike in upcoming meetings (and for the market to adjust its expectations accordingly). Look for general USD strength this week,” says Petr Krpata at ING.

The Pound to Dollar Exchange Rate Outlook: GBP More Resilient

Despite the recent comedown in GBP/USD, the exchange rate still looks resilient and could well extend gains this week.

It must be pointed out that the British pound did actually outperform the dollar last week and is May’s top performing G10 currency.

“There is a strength to sterling now that suggests that the bulls are more resilient. Momentum indicators are more positively configured,” says Richard Perry at Hantec Markets. “The immediate key level to watch is the $1.4585 low from yesterday which could start to be seen as another higher low above $1.4440.”

Perry believes corrections are now being seen as a chance to buy, but the $1.4585 low needs to remain intact.

“There are now a couple of key highs in place at $1.4740 and $1.4770 and a break through these levels would confirm a more bullish medium term outlook,” says Perry.

GBP/USD Looking Bearish Intra-Day

Not convinced on sterling’s outlook on the nearer term timeframe is Robin Wilkin at Lloyds Bank who has noted the deterioration in the near-term GBP/USD charts.

“Intra-day studies remain bearish suggesting this latest rally phase towards 1.48 can see a deeper correction. We still see 1.48-1.4950 as a very strong resistance region. A drop back through 1.4600/1.4550 would confirm a short-term top for a decline back towards 1.4300/1.4250,” says Wilkin in a brief to clients.

Even on the weekly timeframes Wilkin sees sterling trading lower:

“Medium-term we still believe the market should remain in a range between 1.4050/1.3980 (1.35 key below there) and the 1.48-1.4950 region.”

However, the prospect of a GBP recovery over the long-term remains possible:

“A move up through 1.50 is needed to suggest the 30-year support in the 1.40-1.35 has again held and technical analysis would look for a gradual move back towards the 1.60/1.65 over the longer term.”

This technical view chimes with the view of some of the more bullish analysts in the fundamental arena - i.e those institutional researchers who base their calls on drivers such as the economy and central bank policy.

Forecasting a solid recovery in GBP/USD over coming months is Bank of America Merrill Lynch Global Research who tell clients the pound should rise to 1.53 against the dollar by the end of September 2016, ahead of a rise to 1.59 at the turn of the year.

There could certainly be a notable relief rally in the broader GBP complex were the UK to vote to Remain in Europe.

However, other studies on GBP/USD suggest that the exchange rate is already trading at fair value.

Therefore, any strength that would be expected from a Remain vote could be mild, at best.

Research in from Societe Generale suggests that any such rally would leave the pound sterling looking notably overvalued against the US dollar based on 2 year interest rate differentials between the US and UK.

The debate on sterling-dollar continues to evolve, and as always PoundSterlingLive will keep our ear to the ground and bring the latest developments and views on the currencies shifting outlook.