UK GBP/USD Exchange Rate (GBP/USD) Predicted to Decline Further as USD Uptrend Continues

Unfortunately for those hoping for a stronger British pound (GBP) the same assurances cannot be granted as the UK currency is one of many that have succumbed to the resurgent greenback and now finds itself caught in a downtrend.

At the time of writing: 

• Pound to dollar exchange rate (GBP/USD) is 0.07 pct lower on a day-to-day comparison having reached 1.6843.
• The euro dollar rate (EUR/USD), is 0.07 pct lower at 1.3374.

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Pound dollar rate in a downtrend, BUT services PMI reminds markets of UK eco strength

July was not kind to the sterling dollar with the pair in freefall right from the start of the month.

"The break to new recent USD highs yesterday was triggered by the strong US non-manufacturing PMI data which has bolstered confidence in US Q3 growth, and it is hard to oppose USD strength as long as the strong run of US data continues," say Lloyds Bank Research.

At the beginning of the month dollar buyers were being offered a inter-year highs of 1.7192 USD to 1 GBP. We are now stuck below 1.7; this level is expected to act as a resistance point to further advances.

However, we have seen some decent GBP strength recently thanks to decent economic data releases.

"Sterling pared its recent losses to trade above a seven-week low after a much stronger than forecast PMI for the nation’s services sector, which makes up roughly 80% of Britain’s economy. The PMI for services rose to 59.1 in July, its highest level in eight months, which handily beat the forecast for 57.9. The data reminded market participants that the U.K. economy continues to outpace the euro zone and U.S. and that the Bank of England will likely lead in eventual monetary tightening. As such, the pound’s pullbacks should remain relatively short-lived," says Omer Esiner at Commonwealth Foreign Exchange.

The US dollar hits a snag

The dollar has been the big winner lately as a strengthening US economy convinces market participants that the Federal Reserve will embark upon a period of interest rate rises in 2015.

However, the strong run hit a blip on the first of the month when the July US labour market report disappointed expectations.

The US economy added 209,000 new jobs in July (vs. 230K exp. & 288K last).

The dollar fell against the euro in response while gains against the pound sterling were pared back.

However, the outlook for the dollar remains positive as the payrolls data should be looked at from the broader context of a strengthening US economy; this is the sixth consecutive month that the NFP print is above 200K.

Indeed, Lloyds Bank Research tell us at the start of the new week the the Friday blip will unlikely be sufficient to derail the current USD bid tone.

"The tick up in the unemployment rate was due to a mix of higher participation and a smaller rise in employment in the household survey, but with payrolls posting a sixth consecutive 200k+ increase, this should be viewed as encouraging for the US economy," say Lloyds Banking Research.

Furthermore, the ISM manufacturing came in stronger than expected, in contrast to the unchanged reading from the euro area PMI and the sharp fall in the UK manufacturing PMI which helps explain why the pound sterling to dollar exchange rate has struggled lately.

Overall, market optimism towards the USD should remain in place in coming sessions.

"US non-manufacturing PMI and the trade balance data will be watched this week but in the absence of a sharp downside surprise we expect the USD upside bias to continue," say Lloyds Bank Research.

Has the dollar reached its zenith?

There are however those that are questioning the ability of the dollar to rise further.

At present the current driver of the USD are Fed bond yields - these yields reflect expectations as to when the Fed will raise interest rates.

At the present time yields have been dragging the dollar higher in anticipation of an interest rate in 2015.

But, Bank of America Merrill Lynch reckon that further gains may be limited:

"The risk of the Fed having to adopt a more hawkish tone is very limited now. This implies that the front-end of the yield curve has more limited upside potential relative to the back-end as the market adjusts to a later timing of the first rate hike while at the same time it prices in higher potential growth.

"Given the dollar tends to be more correlated with short-term yields this suggests the USD could struggle near term. While a bear flattening of the yield curve is typically the most bullish USD outcome, a bear steepening should be positive for some USD crosses.

"According to longer-run correlations, USD-JPY is one pair we would expect to perform well given its high, positive correlation with 5Y5Y forward yields."