The British pound to dollar exchange rate (GBP/USD) will be tested time and again in what promises to be an eventful week in global currency markets.
"GBP/USD remains offered following last weeks key day reversal – we continue to suspect that the market has topped at 1.5550." - Karen Jones at Commerzbank.
"The current technical picture is indicating that there should be scope for further near-term upside with 1.57 or so as the next target." - Bill McNamara at Charles Stanley.
As we noted in our late-February report, the GBPUSD rate is at a crossroads from a technical perspective.
The UK currency is desperately fighting to keep a recovery that started at the onset of 2015 alive; the ability to hold levels around 1.54 could well determine whether further gains or losses are delivered in March.
This week in particular will in all likelihood decide whether sterling’s recovery has legs or whether the US dollar reasserts itself owing to the large amount of data on tap.
“It looks as if it could be a very busy week on the currency markets as the flow of key data releases is high in this first week of March. Reasonable economic data is expected for the UK and the US but the key question is will the US data be positive enough to boost the likelihood of increased US interest rates before the middle of 2015?” says Carl Hasty at Smart Currency Business.
Rates for Reference
The British pound to dollar exchange rate is trading marginally higher on a day-by-day comparison on Wednesday with 1 GBP = 1.5366.
The euro to dollar rate is trading higher with 1 EUR = 1.1205.
NB: The above quotes and graphic representations are taken off the wholesale markets. Your bank will affix a spread at their discretion when passing on currency. However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Find out more.
Forecasting More Upside for Sterling
It is hard to bet against the US dollar at present – the unit is currently positively positioned in long-term technical studies with the bout of weakness seen in February representing a pause in a cyclical period of strengthening.
That said, an interesting picture in GBPUSD is noted which suggests the game is not yet up:
“Last month’s 3.68% advance marked the end of a seven-month winning streak for the UK currency and, as the chart shows, this looks like a belated reaction to support in the form of the long-term uptrend. The current technical picture is indicating that there should be scope for further near-term upside with 1.57 or so as the next target,” says Bill McNamara at Charles Stanley in a forecast note to clients at the start of March.
Retarget 1.5197 en route to 1.4953
While McNamara remains positive on the pound's ability to comeback against the dollar, Karen Jones at Commerzbank is less inclined to back the UK unit.
In her latest technical note to clients she says:
"GBP/USD remains offered following last weeks key day reversal – we continue to suspect that the market has topped at 1.5550.
"The market briefly traded above its cloud last week – we regard this as a false break higher and usually when these have been seen, markets tend to aggressively trade in the opposite direction.
"The Elliott wave count on the daily chart is suggesting this was the end of the short term correction higher however a break below the 55 day ma at 1.5308 will still be needed to alleviate upside pressure.
"This will retarget 1.5197 en route to 1.4953 the January low."
USD Outlook: All Eyes on Non-Farm Payroll Data
For global foreign exchange central bank policy remains centre of stage. For the United States in particular, the desire of the US Federal Reserve to raise interest rates in 2015 is a key driver of the dollar rally.
But, the Fed will only raise rates if economic data continues to suggest the economy can withstand the impact of higher rates.
The data highlight of the week for USD will be the February employment report (Friday), where another solid outcome in the headline NFP of 235K is expected.
Markets predict the unemployment rate will sink lower to 5.6%.
While we see the issue of inflation becoming increasingly important for the USD, wage growth will also be closely eyed.
Markets forecast headline average hourly earnings of 0.2% m/m to be reported.
“While our forecast is broadly in line with consensus and likely to have limited market impact, solid employment growth and the steady decline in unemployment rate supports our medium-term USD bullish view,” say Barclays.
The British Pound: Manufacturing Figures Give GBP a Fighting Chance
While the demand for dollars will most likely continue to be the overarching story on currency markets, the GBP must hold its own.
The March data series got off to a strong start with the release of better-than-expected Manufacturing PMI.
The seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI® ) rose to a seven-month high of 54.1 in February, up from 53.1 in January.
Markets had expected a release of 53.4.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply comments:
“The rising levels of job creation, now in their twenty-second month, demonstrate that the sector is in buoyant mood this month. This is good news for the UK economy as higher staffing levels mean more opportunity for economic expansion. The consumer goods sector was the star of the show, where there were significant increases in activity and stocks of raw materials continued to rise.