The GBP to USD exchange rate continues to build a base above 1.30 thanks to the Dollar's GDP-inspired misfortunes, but a break below this key level will happen warn a number of analysts.
- Pound to Dollar exchange rate at 1.3255, US Dollar Index 95.53
- US GDP data prints at below-forecast levels, broader Dollar basket slips as a result
- Institutional forecasters warn a break lower into mid 1.20's for Sterling-Dollar as inevitable
The US Dollar was the worst performing currency in G10 in the final week of July. Sterling advanced by 0.6% against the Dollar on the week.
GBP/USD caught a bid in the final trading day of July as the broader Dollar complex was sold off following the release of some below-par GDP figures. The GDP data added losses to those suffered in the wake of the US Federal Reserve update that came 24 hours previously.
US annualised GDP for the second quarter read at 1.2% for the second quarter, well below the 2.6% economists had forecast.
The US Dollar index slipped on the release allowing the GBP/USD to advance by 0.2% to 1.3186 and the EUR/USD to advance by a more commanding 0.5% to hit 1.1133.
“Those eager for the second quarter GDP results to make up for a poor first quarter had their hopes well and truly dashed," says Peter Read, co-founder of trading network Pelican, “The auto industry has been on a phenomenal run but there are signs from Ford that new car sales are weakening, yet last month’s non-farm payroll report was very strong and the Fed has upgraded its outlook on the economy.
“The data is painting a very muddled picture and the uncertainty that a presidential election brings won’t help much. Many observers will be taking a wait and see approach,” says Read.
Dennis de Jong, managing director at UFX.com, lays the blame for the poor data at the door of a decline in consumer confidence:
“Consumers in America appear to be limiting their spending and although the jobs market was seen to be thriving off of last month’s bumper set of figures, May’s nonfarm payroll data was meagre and hasn’t inspired much confidence."
The big question for those watching the US Dollar will be whether the data is enough to throw the US Federal Reserve off a 2016 interest rate rise.
“Regaining momentum in the wake of an unsettled European market will be the next challenge for Janet Yellen and Co. If the US economy can get back on track and prove to be resilient in the face of Brexit then Yellen may just think it’s time for another interest rate hike come Autumn,” says de Jong.
Pound to Dollar Exchange Rate Looks Confident Above 1.30
A solid bottom for the pair appears to be the 1.3050 rate - a level that the currency has not moved below since the start of the month and appears to be where solid buying interest can be found.
Indeed, a break below 1.30 will be a hard ask at this stage notes Kamal Sharma, analyst with Bank of America who notes:
“The outlook for GBP remains uncertain and sterling will be sensitive to a wider array of variables than it has been in the recent past. Our bias remains for further weakness but the failure of GBP/USD to make a sustained break below 1.30 suggests that selling GBP rallies remains the optimal strategy for now.”
Others agree, with the observation that 1.30 is proving a vital level for sterling.
"GBP/USD remains pretty choppy but also remains reluctant currently to sustain a break below 1.3000," says Karen Jones at Commerzbank. "The market is oscillating around the 20 day ma and this has neutralised the immediate outlook."
If anything, Sterling could maintain an upward tone argues Jones:
"The intraday Elliott wave continues to suggest some scope for near term recovery. Above here we have 1.3534, the 29th June high and we remain unable to rule out a rally to 1.3638, the 38.2% retracement and potentially 1.4158, the 61.8% retracement of the recent sell off."
ANZ Targeting 1.25
Nevertheless, that break below 1.30 must come argue ANZ Research who observe a weaker GBP being the clearest trend in markets.
“Policy easing, political uncertainty, and a twin deficit will all keep the pressure on,” say ANZ. “The mix of slowing economic growth, looser monetary policy, and a large twin deficit are negatives for sterling.”
ANZ believe that while the appointment of a new PM and cabinet has stabilised sentiment for now, the uncertain political climate is far from over.
The UK will not trigger Article 50 until next year. The long drawn-out nature of the process is bad for the economy and sterling.
ANZ targets GBP/USD at 1.25 by the end of the Q3.
Capital Economics Targeting 1.20
ANZ Research’s target for 1.25 is far too modest argue Capital Economics whose most recent forecast note on Sterling-Dollar says markets are under-estimating the downside in GBP/USD based on interest rate policy divergence between the US Fed and Bank of England.
Capital’s Alex Holmes notes:
“Investors are underestimating the extent to which the monetary policies of the Bank of England and the Fed are likely to diverge over the next couple of years, which is a key reason why we forecast that Sterling will fall further against the Dollar during that period.”
Capital Economics therefore think that the contrast in interest rates over coming months will be greater than investors anticipate - the immediate implication is that investors could be potentially overvaluing the Pound against the US Dollar as a result.
Holmes and his team believe that the MPC will cut the Bank Rate by 25bp at the August 4th meeting while adding £75bn to the quantitative easing programme.
However, where Capital Economics diverge from consensus is on Fed policy changes.
“We disagree that the Fed will only tighten policy very slowly. Our view is that it will hike again as soon as September and by much more next year than investors assume,” says Holmes.
This feeds into Capital Economics’ forecast for Sterling to fall further against the Dollar in 2017, reaching $1.20/£ from around $1.32/£ now.
Based on the overwhelming consensus we would suggest those watching the market with the view to buying US Dollars should note that anything above 1.30 should be considered a decent rate to buy their currency at.
Indeed, many banks and currency providers will already be offering rates below 1.30, but this is purely a discretionary price as more competitive providers will offer rates towards 1.30.
Once the break below 1.30 is confirmed the inevitable move to the lower-bound targets reflected here becomes increasingly likely.
Morgan Stanley: Sell GBP/USD, Target 1.25
Strategists at Morgan Stanley have meanwhile confirmed they are looking for GBP/USD to sink to 1.25 over coming weeks.
In a strategy update to clients Morgan Stanley mainta a sell on Sterling-Dollar, having entered the trade on 14th July at 1.35.
A stop-loss is placed at 1.38 confirming some GBP strength should be allowed ahead of the eventual break lower.