GBP/USD Forecasts Warn of Decline, but Can Sterling Take Advantage of Imminent USD Pullback?

The US dollar is firm heading into the new week and momentum remains pitted to the downside for the GBP/USD exchange rate.

The British pound to dollar exchange rate (GBP/USD) is seen trading 0.67 pct lower at 1.5974 on Tuesday - just below the key level of 1.60. Those hoping for higher FX rates will be hoping this support level stays unbroken.

"Sentiment towards GBP remains relatively soft, with expectations for the first UK rate hike continuing to be pushed back. The OIS curve suggests this is now priced in for around July 2015," point out Lloyds Bank Research.

Lloyds see scope for GBP gains should UK rate expectations get brought forward. For today, UK CPI will be a focus; the market is expecting inflationary pressures to have slipped slightly to 1.4% y/y in September. (Update - the figure came in at 1.2%, hence GBP is under pressure today).

However, with decent labour market data expected tomorrow, and wage growth expected to pick up, "any dip in GBP on the CPI data could be seen as a good buying opportunity for GBP," say Lloyds.

Please note that all quotes here are spot market quotes. Your bank will affix a spread to the rate they offer. This is made at their discretion. However, an independent provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX on execution. Find out more.

Those hoping for the pound to dollar rate to make an advance could be disappointed as there are other more likely contenders in the running.

Osborne says, "we still rather think that, despite the USD bull trend’s tenacity, there are still signs that the trend is poised to reverse—versus the likes of the JPY and the CAD specifically."

Why Has GBP/USD Not Recovered?

What is holding the pound dollar exchange rate back?

According to Lloyds Bank Research the culprit happens to be interest rate expectations.

There was a time when markets had expected an interest rate hike as early as November - these calls came at the hight of the sterling rally of 2014.

However, Lloyds Bank reckon: "While GBP/USD has managed a modest recovery as a result of the general USD sell off after the FOMC minutes, the recovery is not based on a more hawkish expectation for UK rates.

"In fact, the opposite is true, with the first UK rate hike now pushed out to July – after the first move in the US. While 2 year yield spreads have moved slightly in GBP’s favour, this has been a result of lower US rate expectations further out rather than any move in UK rates."

Nevertheless, Lloyds say they see scope for UK rate expectations to move up from here - if they do then we could see the pound to dollar rate start to show a little strength.

BUT - The Trigger for a Recovery Could Come This Week

We get information on UK inflation on Tuesday while on Wednesday the all important labour market statistics are released.

Markets are looking to see whether the earnings power of the UK population is starting to increase - the Bank of England has previousl indicated thisis the key issue to consider when looking at raising rates.

Only when wages are on a trajectory that will see them comfortably oustripping inflation will a rate rise come.

Selling the Dollar Against the CAD

As mentioned above, TD Securities are lookint to take advantage of a US dollar dip; and the Canadian dollar is a likely candidate to bet on.

Osborne says:

"USDCAD traded heavily this week, with the USD’s corrective undertone overshadowing a 5% drop in WTI crude—something that ordinarily might have weighed more obviously on the CAD.

"Big technical reversal signals (daily and, potentially, weekly) in the high 1.12s this week—right where USDCAD peaked in March suggest an important, short-term (at least) top has formed.

"We want to sell USD gains back to near 1.1200 in the coming week."

USD/JP - a Dip Ahead?

And the yen is another likely beneficiary of a USD dip.

On the dollar yen pair TD Securities reckon:

"USDJPY remains vulnerable to the downside, we think—especially in view of the sharp drop in longer-term US yields and the compression in US-Japan spreads and the drop in equity markets that boost the attractiveness of the JPY as a safe-haven."

However, keep in mind that TD Securities base case remains that the longer-term picture is pro-USD, therefore betting against the dollar should be done with short timeframes in mind.