GBP Forecast to Come Under Selling Pressure as Overbought Conditions Persist

A look at the mid-market rates in mid-week trade shows yet another solid performance for the UK unit:

• British Pound / Euro exchange rate: 1.1519
• British Pound / US dollar: 1.3084
• British Pound / Australian dollar: 2.0807
• British Pound / Canadian dollar rate: 1.8143
• British Pound / New Zealand dollar rate: 2.2461
• British Pound / South African Rand rate: 25.0275

Please be aware that the above mid-market quotes are subject to a discretionary spread levied by your bank when making international payments. An independent FX provider will however seek to undercut your bank's offer and in some instances can deliver up to 5% more currency on execution. To learn more, please read here.

Sterling powers ahead

Sterling has been pushed to twenty-two month highs against the euro and six-year highs against the US dollar as better than expected manufacturing and construction data cements the belief that UK interest rates will increase sooner rather than later.

"These new levels could provide a good opportunity for businesses to lock in an excellent budget price for the year ahead. Meanwhile sterling buyers may wish to consider the future impact this will have on their profit margins," says Carl Hasty at Smart Currency Business.

Greg Anderson at BMO Capital warns that the GBP may be over-extended at this time:

"The move in GBPUSD represents a new cycle high but the fact that shockingly good data can’t take GBP higher may be a sign that the market can’t get much longer."

Tuesday's better than expected manufacturing PMI was enough to propel GBP/USD to another new multi-year high and Lloyds Bank tell us they continue to looks for a short term target near 1.73 to be reached.

"Even so, GBP valuations do look a little stretched, and it certainly looks as there is plenty of speculative long GBP positioning being held," warn Lloyds.

From a medium term perspective, it seems unlikely that the UK will continue to outperform the growth outcomes in the US and Eurozone indefinitely, so these levels may well prove a good longer term hedging opportunity.

Pound dollar exchange rate forecast: Bullish strength at risk of waning

The pound dollar rate is still trading within an overall ascending channel.

"The pair's AROON Indicator is showing a sharp drop in the bullish strength with the beginning of this week, as MACD is almost achieving a negative divergence. Stability below 127.2% correction at 1.7080 makes the possibility of a downside move valid this week, but Linear Regression Indicators are positive," warns the latest technical analysis on the pair issued by ICN Financial.

Should a downside breaking of 1.6960 transpire then the resultant downside move could break the bullish support of the ascending channel.

"The appropriate Risk/Reward Ratios in addition to stabilising below 1.7080 encourages us to suggest an intraday downside move this week. Taking into consideration that these expectations will be cancelled if the referred to resistance 1.7080 was breached," say ICN Financial.

Euro pound exchange rate (EUR/GBP) forecast: Over-extended?

Sean Lee at ForexTell informs us that the market is heavily short of EUR/GBP in an environment where there aren’t many other big positional trades going on.

"I guess we can make an argument either way here; perhaps the market has plenty of scope to increase shorts as there are so few positions elsewhere, or the lack of general momentum will cause the shorts to run for cover soon.

"I’m still of the view that we are headed to .75 but the ‘easy’ money has been made in the move from .85 to .80 and now that the move is more mature, we are likely to see more of a grind lower with plenty of profit taking rallies along the way.

"I’ve heard quite a few reports in the last few weeks of heavy profit taking by big hedge funds in GBP/CAD, GBP/JPY as well as EUR/GBP."

What is making the pound tick?

Sterling ended last week slightly down against most of its major partners but is holding close to its recent highs against both the US dollar and the euro.

Last week’s UK growth figures showed an expansion of 0.8% which was as expected – significantly better than the US’s surprise figures showing a 2.9% contraction.

The real surprise of last week in the UK was the back tracking of Mark Carney, the Governor of the Bank of England, who was less certain as to when UK interest rates would be increased than he had been the previous week which had been the cause of sterling sudden surge.