Pound Sterling: GBP / USD Exchange Rate Has Sites Fixed on 1.7 Ahead

It has been a strong start to the week for the GBP family with gains being seen across the board.

On Tuesday the latest set of GDP statistics were rekeased; as the market reaction shows the pound appears to be highgly sensitive to data misses.

Following the release of the data, the pound sterling (GBP) complex fell. However it is the recovery across many pairs that is of interest:

• The pound euro exchange rate recovered to record gains of 0.43 pct having reached 1.2188.
• The pound dollar exchange rate is 0.18 pct higher at 1.6838.
• The pound Aus dollar exchange rate is 0.13 pct higher at 1.8180.
• The pound NZ dollar rate is 0.16 pct higher at 1.9724.

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Don't panic Over GDP data

The initial reaction to today's data miss saw selling pressures ensue.

• Gross Domestic Product (YoY) (Q1): Read at 3.1% vs 3.2% expected.
• Gross Domestic Product (QoQ) (Q1): Read at 0.8% vs 0.9 expected.

Commenting on today's GDP release is Dennis de Jong at UFXMarkets:

"The pound has risen to fresh highs against the dollar in recent days but the slightly weaker than expected GDP figures have seen it fall back and it could drop below the 1.68 mark. Although this is a very minor blow for the Chancellor and the Bank of England, the outlook is still positive and the British economy remains buoyant."

Traders figured this to be the case in the hours following the data release and buying ensued. The GBP - USD is forecast to test 1.7 while the GBP -EUR could take on 1.22.

Critical level for pound dollar rate

The Cable is at a key resistance level; performance around here will ultimately determine the outlook on a purely technical level.

"GBP/USD failed to break the 1.6842 high despite a few attempts last week. Domestic data over the coming week will provide a further update over the growth outlook for the first half of the year," say Lloyds Bank Research in a Monday morning brief to clients.

Looking at the docket, the preliminary estimate of Q1 GDP tomorrow will be the key focus; market is expecting growth to have accelerated to 0.9% q/q.

April's manufacturing PMI on Thursday will also be of interest and may set the tone for expectations for Q2.

"GBP/USD will largely depend on key releases from both the UK and US this week. There are risks we could see a break of the recent high; however, we suspect we would need to see either stronger UK or weaker US data to trigger such a move," say Lloyds Bank.

Why is the British pound higher?

An interesting analysis of recent GBP action comes via Sean Lee at FXWW:

"Cable tends to reverse larger moves in the Asian session at the London open and this has happened again today.

"The Pound was driven lower ahead of the Tokyo open by selling in the cross pairs (GBP/AUD & GBP/JPY).

"GBP/USD now trading higher as we are heading into the European open, moving towards 1.6820.

"Reuters reports that US pharma giant Pfizer has confirmed their takeover interest in UK’s AstraZeneca. The deal could be worth more than $100 billion, according to sources."

Pound euro continues to struggle at 1.22

Concerning the pound euro exchange rate, International FX tell us, "GBP / EUR continued its upward trend trading up slightly to a day high of 1.2150 but continued to trade throughout the day in a tight 30 pip range. The psychological level of 1.2200 is proving hard to breach and may well need a bit of game changing data over the next few week to gather enough momentum to be broken."

Looking ahead, data out this week has the potential to help Sterling gain further ground. Tomorrow the first quarter GDP estimate is the key focus; consensus is for growth to have accelerated to 0.9% q/q. This is followed by April's manufacturing PMI on Thursday which may set the tone for expectations for Q2.