GBP/USD Forecast: Has the USD Rally Overextended?

However, we do note that the pound sterling (GBP) could be due a fresh bout of strength against the dollar and euro as UK gilt yields are expected to pick up.

• At the time of writing the pound to dollar exchange rate (GBP/USD) is trading 0.04 pct higher at 1.6396.
• The euro to US dollar rate (EUR/USD) is 0.11 pct higher at 1.2860.
• The US to Canadian dollar exchange rate (USD/CAD) is 0.09 pct lower at 1.1068.

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Forecasting Further USD Strength

The notion that one should not 'fight the trend' in financial markets is a powerful reason to back the US dollar at the current moment in time.

Indeed, Bill McNamara at Charles Stanley notes that the Greenback could well undergo some form of profit-taking, however the longer-term forecast backs further USD strength:

"The surge in the dollar continues and last week’s 0.58% advance marked the index’s tenth consecutive weekly advance. As the chart below illustrates, this powerful surge has taken it to new highs for the year and, in fact, to its highest reading since Q3 2010.

"Unsurprisingly, this surge has left the US currency looking extremely overbought – its 14-week RSI pushed above 80% last week – and although it would not be surprising if this led to some short-term profit-taking there is still little in the chart to suggest that there are many sellers about."

BUT - Sterling Dollar Forecast to Remain Supported

However, there do exist signs that the rally in the USD could soon become exhausted.

Lloyds Bank Research tell us that there is a lot of US outperformance now priced in, "and there is relatively little significant data this week on which to base an extension of USD strength."

The pound dollar exchange rate is one pair that is forecast to find itself supported as we move forward.

Commenting further, Lloyds tell us:

"After an initial positive reaction to the Scottish referendum “no” GBP/USD slipped back below pre-referendum levels by the end of Friday’s trading, and broadly back to pre-referendum levels against the EUR.

"Partly this reflected the fact that much of the GBP recovery had been seen ahead of the referendum, but the decline in GBP/USD was also partly a reflection of the continued rise in USD short term yields.

'Even so, if anything the risks from here look to be towards slightly higher UK rate expectations, so we would expect GBP/USD to find support near 1.63, with current yield spreads consistent with the current level of GBP/USD."