British Pound 10/02: GBP Forecasts, Predictions and Insights

• £ vs Euro:
  1.1984
• £ vs Dollar:
  1.2579
• £ vs Australian Dollar:
  1.9417
• £ vs Canadian Dollar:
  1.7747
• £ vs New Zealand Dollar:
  2.1551
• £ vs Rand:
  22.8639

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A great point by business commentator Richard Northedge who argues an interest rate rise has nothing to do with forward guidance but good old politics. If this is indeed the case then markets have miss priced an interest rate rise and potentially overvalued sterling.

Northedge says the Bank of England won’t want to raise rates while politicians are campaigning:

"The Bank is independent of politics, of course. But it is appearances that count. That election date means the bank will not raise rates in May 2015. Or April, while the parties are on the hustings. And it’s highly unlikely the Bank would even risk March, given that the campaigning will already be hotting up by then. Indeed, any time from January 2015 until polling day would be contentious."

"GBPCAD remains resistant to the corrective forces that have accumulated in the past couple of weeks. We noted Friday that we were not convinced that the cross would drop too far and price action suggests that bargain-hunting buying is a force to be reckoned with at the moment. There is a clear “rounded’ nature to the short-term basing price moves seen over the past week, suggesting steady accumulation on dips—this is usually a positive sign but one that will need to see quick progress higher again to satisfy the bargain-hunters. Gains back through 1.8230 would be positive." - Shaun Osborne at TD Securities.

UK business optimism reached its highest level for 22 years in January, indicating that the economy will continue to grow rapidly over the coming six months, according to the latest Business Trends report by accountants and business advisers BDO LLP.

The BDO Optimism Index, which predicts business performance two quarters ahead, reached 103.8 in January, up from 103.4 in December. This is the highest reading ever recorded since readings began 22 years ago and sits well above the 100.0 mark, meaning the UK is expected to outperform its long-term historical growth trend.

In the manufacturing sector, the Optimism sub-index rose to a new all-time high of 117.1 in January, up from 115.5 in December. And for services, which accounts for roughly three quarters of the UK economy, confidence rose to 101.2 in January, up from 100.7 in December.

A quarterly index of 4,000 small and medium-sized enterprises in the UK has shown that the fourth quarter of 2013 saw the highest level of business activity since it began tracking in 2007.

The Business Factors Index, produced by independent business funder Bibby Financial Services, tracks the monthly turnover of businesses across five industry sectors - manufacturing, construction, transport, wholesale and business services. Its base point of 100 was established when the Index began in 2007.

Echoing the official GDP figures announced by the Office for National Statistics on January 28, the Business Factors Index indicates record levels of growth across the board and particularly strong performances in manufacturing (up 9.1 points quarter-on-quarter) – helped by a strengthening domestic market – transport and haulage (up 13 points), and more modest growth in business services (up 4.1 points).

This from Piet Lammens at KBC Markets who still sees potential for further GBP gains over the EUR despite the recent negative price action:

"We have a longer term sterling positive bias longer term as the BoE will probably tighten policy sooner than the ECB. EUR/GBP is captured in a gradual downtrend channel since mid 2013. Recently, we favored short-term consolidation as some good news is already discounted and as some UK eco data were slightly less buoyant.

"Last week, the EUR/GBP cross rate tested the 0.8350 resistance as the ECB was less soft than expected. For now, the resistance held. We don’t change our LT sterling positive bias yet, but a break above the 0.8350 would be an indication that the correction has some further to go. 0.8405 is the next point of reference on the topside in EUR/GBP."

"GBP/USD traders also seem a bit slow to roll out of bed this Monday morning; in fact, the pair has consolidated in a tight 45-pip range for the entire thus far. The recent Doji candle on the 4hr chart underscores the balanced, two-way trade and lack of momentum in the pair as traders exercise caution ahead of Wednesday’s highly anticipated Quarterly Inflation report out of the UK." - Matt Weller at GFT.

"GBP-USD may remain aloft in the near term following NFP induced dollar softness (and despite disappointing GDP and trade readings last Fri) but it remains to be seen if the pair can overcome its 55-day Moving Average (1.6410). Inherent downside risks my already have been priced into this week’s BOE Inflation Report but a relapse back into the 1.6250/60 neighborhood cannot be discounted if the BOE is more dovish than expected." - Emmanuel Ng at OCBC Bank.

Sean Lee on the difficulty in calling price action in GBP/USD at present:

"For all of this recent bullish activity though the Cable is still stuck in ‘no man’s land’ at the moment as it trades between two major S/R levels: the monthly 200 EMA above price and the broken monthly triangle trend line below price. I would expect the choppiness to continue until a clear break is made out from this zone, either up or down.

"A possible target for any continued bullish movement might be the 61.8% fib level of this same move. This 61.8% fib level is about 1,900 pips away at the 1.82 area and might seem an impossible task but I’d advise you to look at the monthly chart of the E/J and U/J before you reject this. Price might continue to struggle given that the monthly 200 EMA is above and this resistance zone could reject price and cause it to make a prompt move back down. Thus, I’m watching for any reaction here and will trade with the next momentum move, either up or down!"

Investec update us on the prospects for Cable this week:

"GBPUSD has well and truly bounced from the 1.6260 support to reclaim a birth at 1.64 and open up for a retest higher - that support level is now even more important for the pair and when we break below it will likely see considerable momentum, which could drag GBPUSD close to 1.6000.

"A potential catalyst for a GBPUSD move lower this week is the Bank of England Quarterly Inflation Report on Wednesday. Many economists expect Governor Mark Carney to change the current forward guidance rhetoric and potentially lower the knockout criteria for a review on policy, since the UK unemployment rate has fallen more sharply than expected."

This note reminds us why it is we should keep an eye on longer-term trends:

"Sterling has run up to test resistance in the form of the major long-term downtrend i.e. the one that has been in place for the last seven years, so it is not altogether surprising that it has retreated from this line at the first time of asking. In fact, sterling could fall yet further in the near term, although its weakness is likely to be restricted to a test of the short-term uptrend that currently stands at around 1.193." - Bill McNamara at Charles Stanley.

ICN Financial on this week's GBP/USD outlook:

"The pair managed to move to the upside and stabilised above 1.6390 which is positive because it favours extending bullishness of the alternative Bat Pattern as showing on graph. Based on technical analysis rules, stabilising above the referred to level represented in 38.2% correction might extend bullishness towards 1.6485.

"Of note, 1.6485 level determines the bullish extension, whereas breaching it might extend the upside move towards 1.6545 while failing to breach will bring the overall downside move again."

The euro pound exchange rate continues to be rejected by resistance. With market action likely to be subdued as we head into Wednesday, we would expect the level to prove difficult. Any surprises from the Bank of England could however see the level breached.

ICN Financial say:

"The pair found strong resistance at 0.8340 which is the resistance of the main Falling Wedge shown on graph, supported by negativity on Stochastic and downside pressure from the MA 50, forcing the pair to fluctuate around 0.8285 once again.

"In general, stability above the latter keeps chances for the pair to revive positivity over intraday basis, and a breach of 0.8340 will push the pair toward 0.8410 then 0.8560 taking into account that a breakout below 0.8285 will force the pair lower to retest 0.8160 before attempting higher once again."

While much GBP focus this week will be turned to the Bank of England, we must keep in mind that the Fed's Yellen is also an important event risk.

Danske Bank analyst Anders Vestergård Fischer says:

"Focus this week turns to new Fed chairman Janet Yellen's semi-annual testimony on monetary policy before the House's financial committee on Tuesday and before the Senate Banking Committee on Thursday. We believe she will signal that the Fed is likely to continue tapering asset purchases but will be flexible and monitor labour market developments very closely."

Ahead of this week's all-important Bank of England Quarterly Inflation report we are hearing more calls for the Bank to shift approach.

The policy of targeting definable figures has been rubbished to some extent, Forward Guidance should now be qualitative say analysts such as Kathy Lien at BK Asset Management:

"We think tying monetary policy to the jobless rate was a big mistake for U.K. and U.S. policymakers and both should abandon this rule completely and move to something more qualitative to manage the market's expectations. This option would create less volatility for their financial markets and the currency than a change in the level of the threshold."

UniCredit Bank give the following prediction for the GBP/USD today: "The lower USD on the back of weaker US labor data lifted cable back to 1.64 with investors now waiting for the BoE’s inflation report on Wednesday. The bank is likely to reduce its jobless rate forecast and this is expected to provide sterling with some tailwinds back towards 1.65."

Geoffrey Yu at UBS gives the following forecasts for the British pound vs the EUR and USD:

"While resistance holds on closing basis at 0.8349, the cross remains vulnerable as bearish conditions persist. Support is at 0.8266 ahead of 0.8160.

"As a reaction to the recent sharp sell-off which stalled just above main support at 1.6220, there’s scope for upside in the near-term. Resistance is at 1.6411 ahead of 1.6509."

"The main focus will be on any new forward guidance from the Bank given that their unemployment threshold has now nearly been reached. In practice we doubt there will be any new specific thresholds from the Bank, and this may be mean upside risk to UK yields and GBP. However, most do expect the Bank to revise down inflation projections, and this should mean any impact is modest." - Lloyds Bank Research give their predictions ahead of the Quarterly Inflation Report.

Looking back, the British pound (GBP) performed well on Friday in spite of slightly disappointing industrial production numbers, helped by better trade data, but the Inflation Report will be the big focus in terms of rate expectations and consequently yields and GBP going forward.