Pound to Dollar (GBP/USD) Exchange Rate Forecast: "Limited Downside Risk and Firm Support in Upper 1.31s"

September 10, 2017 - Written by John Cameron

STORY LINK Pound to Dollar (GBP/USD) Exchange Rate Forecast: "Limited Downside Risk and Firm Support in Upper 1.31s"

"Sterling [GBP/USD] seems to be setting itself up for a bit of a squeeze higher in the near-term. Minor consolidation price action late last week has given away to renewed gains so far on the session and a retest of Friday’s high. We see gains extending above 1.3220 towards the upper 1.32s near-term as trend strength oscillators are aligned bullishly across a range of timeframes. This should mean limited downside risk and firm support in the upper 1.31s." Scotiabank

The pound to dollar exchange rate has recovered yesterday's losses, quoted at £1 = $1.31959 on Tuesday 12th September, after the UK's EU Withdrawal vote passed overnight.

This had been the first key GBP-risk event of note, as noted by Lloyds in a brief to clients on Monday.

"The UK focus today remains on the EU Withdrawal Bill, ahead of key data releases and the Bank of England policy announcement on Thursday (no change expected)" note Lloyds in a brief to clients on Monday morning.

Strong GBP Performance on Last-Minute GDP Data

Last week saw GBP/USD progressively gain, opening at an exchange rate of 1.2951 and closing in the region of 1.3197.

The Pound rose steadily against the US Dollar in the previous week, thanks partly to low US economic confidence.

On the UK side, Friday saw a last-minute rise on manufacturing and GDP data. The level of monthly manufacturing production rose above forecasts in July, while annual manufacturing levels also climbed from 0.6% to 1.9% above estimates.

The other surprise support was Friday’s National Institute of Economic and Social Research (NIESR) GDP estimate for Q3. While UK PMIs have been disappointing recently, the organisation still upgraded their forecast from 0.2% to 0.4%.

US Battered by Two Storms in as Many Weeks

The US Dollar’s failure to resist the rising Pound last week came as another major storm descended on US territories.

Following on from Hurricane Harvey in late August, Hurricane Irma caused havoc across the Caribbean before being poised to plough right into Florida.

After the immediate issue of keeping people safe, focus has also been on how much it could cost to repair the widespread damage caused by the storms.

Domestic news was little better for the US, with a trio of late-week hawkish Fed speeches failing to excite traders. As well as the impending storm, attention was also centred on Donald Trump making a deal with the Democratic Party.

Trump inflamed tensions in Congress by arranging for the government to remain open to pay off debts associated with Hurricane Harvey, against vehement Republican wishes.

This Week’s Pound to US Dollar Forecast: GBP Volatility Possible on UK Inflation

After a positive performance last week, the Pound could extend its gains against the US Dollar this week if volatility does not become the dominant factor.

The main announcements will include inflation on Tuesday, jobs on Wednesday and the monthly Bank of England (BoE) interest rate decision on Thursday.

Taking these in order, annual inflation is tipped to fall slightly, which could unsettle GBP traders. Lower inflation lowers the chances of the Bank of England (BoE) raising interest rates, but if inflation falls as expected it would still be above the BoE’s 2% target.

On the other side, the pace of wage growth has been glacial in recent months so inflation falling closer to wage growth would be good news. This is because a reduced wage squeeze on UK consumers might free up funds to spend in the retail sector, which would in turn push up GDP.

The rate of average earnings will be part of Wednesday’s cluster of jobs stats, coming alongside news about unemployment and jobless claims. Estimates are for higher jobless claims and no change in unemployment; wages are also expected to show no change in July.

While rising wages would be better than flat wages, no movement is better than a decline when inflation is moving closer to wage growth.

For the main event, the BoE interest rate decision, the UK central bank is not expected to touch rates, but the following press conference could be telling of the central bank’s current outlook.

Comments may be made about the volatility of the Pound and the ongoing Brexit negotiations. Broadly speaking, if the press conference and minutes reveal cautious sentiments among BoE policymakers then the Pound could slip against the US Dollar.

After Irma has wound down during the week, thoughts will be turning to the cleanup effort. In the wake of Hurricane Harvey in late August and this more recent battering, it seems probable that repair and recovery costs will be high.

An extremely large estimate may see the US Dollar open weekly trading in low demand, given the debt associated with footing the bill.

The aftermath of storms aside, key US data this week will cover inflation rate stats on Thursday, followed by retail sales and a confidence measure on Friday. At the time of writing, core inflation was tipped to rise from 1.7% to 1.8%, a minor sign of growth.

In the context of last week’s hawkish Fed speeches, higher inflation could inspire a clear US Dollar advance as it would raise the chances of the Fed hiking interest rates.

Any USD GBP advance may prove short-lived, however, if Friday’s retails sales figures slow as expected. While sales are not predicted to contract in August, they are nonetheless projected to decline across all fields.

Ending the week will be the afternoon’s University of Michigan consumer sentiment score. This is predicted to post a marginal rise in confidence, which may be enough to inspire a minor USD rise before the close of trading.

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