British Pound / Dollar Exchange Rate Seen Fast Approaching Initial Target at 1.28

The GBP/USD exchange rate has fallen below the 1.30 area and appears to be headed towards the target levels set out by our studies.

Sterling is under pressure in line with the Bank of England's announced intentions to stimulate the UK economy through asset purchases and interest rate cuts.

The US Dollar meanwhile continues to find steady demand on thanks to a strong July jobs report.

The pressures ensured the Pound to Dollar exchange rate fell from a weekly open at 1.3220 and closed at 1.3066 ensuring the Pound earned itself the accolade of worst performing currency in the G10 sphere.

The GBP/USD is quoted at 1.2977 at the time of writing with market data confirming downside pressures may actually be growing.

The decline in GBP/USD pair comes despite the pair having formed a bottoming pattern in the lead-up to the Thursday 4th Bank of England event. 

Indeed, it looked for a while poised to break higher, however that was before the combination of the BoE releasing a comprehensive stimulus plan and US Payrolls surprising to the upside.

The validity of the bottoming, reversal pattern, which was thought to be an inverse head and shoulders, has now been brought into question.

Whilst it is still possible that the exchange rate could rally once again and break above the neckline for the pattern at 1.3400, the probabilities are lower.

Nevertheless, a break above the 1.3450 level, would probably indicate a rally up to the next target at 1.3540 where the R1 monthly pivot is likely to cap gains, even only temporarily.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3335▲ + 0.06% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2881 - 1.2935
**Independent Specialist	1.3148 - 1.3201 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The BoE meeting sell-off however, has brought the exchange rate back down below the previous swing lows at 1.3061.

The possibility that the Brexit down-trend could be starting again is likely, especially given the strong US payrolls data on Friday, and from a technical perspective a break below the psychologically important 1.3000 barrier would be a confirmation signal for more downside, to an initial target at 1.2800.

Others agree with the assessment that downside pressures are reigniting.

"The GBP/USD lost 157 pips this week but before BoE’s decision was trading 300 pips higher from the close of the week. Just like the EUR/USD, I expect the pair to continue lower. It could be traded from current level, aiming for support at 1.28 or wait for eventual bounces from resistance around 1.34 area," says Sean Lee, a professional trader who heads up the ForexTell trading community.

The Pound: ‘Data in the Driving Seat’.

In relation to the Pound there are some who think ‘the worst may be behind the currency’, although that does not mean there will necessarily be much upside ahead in the short-term either.

Financial markets sold off heavily after the UK voted to leave the EU, but they have now recovered and made new highs – we maintain that if the fallout was still a major risk factor equity markets for one would not be in such good shape.

The BoE also appears averse to lowering interest rates any further, and of the various different forms of monetary stimulus this would be the most negative for sterling; monetary stimulus in general, globally that is, also appears to be losing its impact, the UK included.

Nevertheless, as pointed out by broker TD Securities, the key to the pound remains data for the period after Brexit, in other words for July.

The problem is that there is still a lack of data for July on which to base a fair assessment of the impact of the referendum on the economy, and in the week ahead this remains a problem as there are only two release for the period.

One is the British Retail Consortium's (BRC) retail sales figures out on Tuesday, and the other is the NIESR GDP Estimate for July on the same day.

Whilst BRC sales is normally a tier three release of little significance, in the week ahead its importance will be temporarily exalted.

Clearly a positive result for July data could help sterling recover; whilst a negative would confirm fears that the economy is declining steeply following the impulsive breakaway from Europe.

Has the Pound hit Bottom?

The resillience shown by Sterling to the recently-announced stimulus at the Bank of England has caught many analysts by surprise.

A rate cut to 0.25% was expected, as were some other measures were previously hinted at. 

It was the £60bn in government bond purchases, £10bn in corporate bond buying and new Term Funding Scheme (potentially worth another £100bn), that went above and beyond what was expected.

"So the fall in sterling by 'just' 1.5% on the day to remain well above recent lows still is a little surprising," says Jeremy Stretch, an analyst with CIBC Markets in London, "that could partly be because positioning was already so skewed against the Pound."

Stretch says it could also be because analysts are doubting whether the economy will behave quite as badly as the BoE expects, with outperformance potentially seeing a rethink down the road.

The central bank is ready to lower the bank rate further if needed and increase all elements of Thursday’s package but Carney also made it very clear that the “lower bound in interest rates is above zero” and he is “not a fan of negative interest rates.”

Carney believes that helicopter money is a “flight of fancy” and he doesn’t see a scenario where negative rates is discussed, so if BoE were to ease again, it would be in other ways like additional bond purchases.

For BK Asset Management’s Kathy Lien, Sterling may have bottomed as she argues it as unlikely that the BoE will cut interest rates any lower, after BoE governor Carney expressed a clear aversion to negative interest rates at the last press conference:

"The bank reduced its GDP outlook for 2017 but kept its 2016 forecasts unchanged. It also believes that inflation will rise given the weakness of the pound. Having taken such an aggressive stance, the Bank of England is now in wait-and-see mode, which could actually lift sterling because of the extreme level of short positioning,” says Lien.

The US dollar: All Down to the Fed

After the impressive come-back in Non-Farm Payrolls in June many investors are arguing that the Federal Reserve may see fit to increase interest rates in September -  a move which would be positive for the dollar as it would attract more capital from yield-seeking international money men.

Analysts’ views are mixed about the strong jobs report is likely to lead the Fed to raising rates in 2016.

Those critical of the likelihood of the Fed raising rates point to sluggish growth, the timing of the presidential election and the persistence of opaque international risk premia, as the main reasons for deferring.

Swissquote’s FX analyst Yann Quelenn, for example states that: “The collapse of oil prices, the Brexit and then the US elections are or will be the Fed excuses for holding rates in 2016.”

Whilst Kathy Lien of BK Asset Management said that whilst the data would increase calls from hawks to raise interest rates, “We are still skeptical of the Fed’s commitment to raising interest rates this year.”

Capital Economics’ David Rees was more optimistic about the chances of a hike, despite the likelihood of poor growth in Q2:  

“Looking ahead, while the payrolls figures are probably not enough to trump weak Q2 US GDP data and trigger a rate hike at next month’s FOMC meeting, we still think that there is a good chance that one will be delivered before year-end. Moreover, we continue to believe that the Fed funds rate will reach 1.50% next year, which is much more than is discounted in the market.”

Rees also outlines the implications of such a move by the Fed:

“The implications of this for the US are clear. Treasury yields would climb – we expect the 10-year yield to rise to 3% next year – while the dollar would strengthen even further and weigh on the stock market. This is one reason why we think the S&P 500 is unlikely to sustain its recent strong performance and that it will rise by only another 10% or so by the end of 2018. The flipside of this is that weaker currencies should support a better performance by equities in Japan, Europe and perhaps even the UK.”