Pound Euro & Pound Dollar Exchange Rate FORECAST: Where Next for GBP/EUR + GBP/USD

The UK currency continues to suffer a soft July against the USD having lost significant upside momentum in recent trading sessions. Many analysts had warned that after a strong year of trading the UK unit was always likely to enter a period of softness.

We could now well be experiencing that correction lower.

• At the time of writing we quote the pound to euro exchange rate at 1.2638.
• The pound to US dollar exchange rate is now on the decline and we see 1.6905 being quoted.

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Forecast for the pound dollar exchange rate (GBP/USD)

The market had been overly optimistic towards the prospect of early rate hikes following hawkish comments from Governor Carney’s Mansion House speech.

"Rate expectations have pared back over the past few weeks, and while UK data has been decent, it has failed to fuel market optimism towards the first BoE rate hike. This prompted the squaring of some GBP longs positions and saw GBP/USD lower. We view bias remains to the downside in GBP/USD unless we see some stronger than expected UK data or some weaker US data that would a move in 2y relative rate spreads in favour of GBP," say Lloyds Bank Research.

Ipek Ozkardeskaya at Swissquote Bank says:

"Technically, GBP/USD grinds steadily lower facing decent option related offers at 1.7000/25 zone for today expiry.

"The pair remains comfortably in its year-to-date uptrend channel (1.6888/1.7362). The next support zone is seen at 1.6923/64 (June 18th low / 50-dma)."

Karen Jones at Commerzbank says:

"GBP/USD came under pressure and the outlook remains negative while capped by 1.7205. The market is directly offered below the 20 day ma at 1.7111. The recent high has been accompanied by a large divergence of the daily RSI – this reflects a loss of upside momentum.

"The key support to crack is the base of the expanding top at 1.7012 (on a closing basis). Intraday rallies are indicated to terminate circa 1.7100/25. We look for losses to extend back to the 2014 uptrend, which today is located at 1.6889.

"Current trade: Short 1.7103. Recommended Trade: Add 1.7110, 1.7125, stop 1.7205. Exit 1.6900 "

Forecast for the euro pound exchange rate (EUR/GBP)

Ozkardeskaya says:

"EUR/GBP recovered to 0.79236 post data. Trend and momentum indicators are marginally bullish after rebound from the year low of 0.78748 hit on July 23rd.

"Offers pre-21 dma (currently at 0.79416) should limit the rallies. More resistance is seen at June-July downtrend channel top (today at 0.79694). On the downside, decent option related offers sit at 0.78000 before the weekly closing bell."

Jones says:

"EUR/GBP’s price action yesterday was interesting. The new low has been accompanied by a triple divergence of the daily RSI and we note a potential falling wedge. What does this mean? We suspect the downmove for now is exhausted.

"A close above .7934 should be enough to trigger a rally towards the .8000 2014 downtrend, where we would expect the rally to fail.

"Current Position: Longs from .7907 stopped .7985 Recommended trade: Attempt tiny longs at market, add.7885, stop.7870. Exit .7980."

Pound sterling weakens as UK data disappoints

Turning to the fundamentals, we get an idea as to why the Uk currency has turned softer.

UK retail sales ex-autos unexpectedly contracted by -0.1% in month to June, pulling the retail sales growth down to 4.0% (vs. 4.7% last) on yearly basis.

The retail sales including autos slowed from 3.9% to 3.6% y/y.

"GBP/USD sold-off to 1.7009 as traders positioned in line with Carney’s comments on the future of BoE’s monetary policy. In his speech in Glasgow yesterday, the BoE Governor Carney highlighted the importance of data in decision to start rising the bank rates," say Swissquote Research.

Today’s data was clearly not supportive of BoE hawks, yet according to Confederation of British Industry, the expansion in retail sales should continue given the higher consumer spending in food and clothing.