Could the Pound Rally in September? Reasons Why This Analyst Thinks Sterling is on Course for Gains

Analyst Kathy Lien at BK Asset Management is one believer who reckons sterling could be in for a strong rebound at the start of the new month.

For reference, the GBP has entered the new month at the following levels:

• The pound to euro exchange rate (GBP/EUR): 0.13 pct higher than at Friday's close at 1.2656.
• The pound to dollar exchange rate (GBP/USD): 0.15 pct higher at 1.6622.
• The pound to Canadian dollar rate (GBP/CAD): Unchanged at 1.8052.

PS: All the above are spot market quotes, your bank will affix a discretionary spread to the figures. In order to get as close to the market rate we suggest consulting an independent FX provider, the delivery of up to 5% more currency is possible in many instances.

Reasons Why the Pound Could Bounce

As mentioned, Lien reckons the pound could be in for a strong start to the new month.

In a comment to clients she says:

"We are looking for a stronger rebound in sterling next week based on the prospect of positive economic data.  

"Although there was not much in the way of U.K. data released this past week, nearly all of the second tier economic reports fuelled expectations for a stronger recovery.  

"This morning for example, Nationwide reported a 0.8% increase in house prices, exceeding the market's 0.3% forecast.  Last night, GfK reported a rebound in consumer confidence with more respondents to their survey looking for an improvement in the economy.  

"This follows a sharp rise in the CBI retail sales report and the British Chambers of Commerce's decision to upgrade their 2014 GDP forecasts.  We are looking for this strength to carry through into next week's PMI reports."

Data to Watch

A new month brings with it new opportunity with PMI manufacturing and service indexes tipped to show acceleration in growth during the month of August.

This could be just what sterling needs to stage a stronger recovery.  

The Bank of England also has a monetary policy announcement but no changes are expected which means it will be a nonevent for the currency.

"GBP/USD consolidated for the past week between 1.6518 and 1.6614. It failed to close above 1.66 on every occasion but its persistence in testing this level signals the market's desire for an upside break," says Lien.

Euro Weakness Tipped to Persist

The pound to euro exchange rate rebounded in impressive fashion at the close of August.

Keep an eye on the euro to dollar rate for guidance, weakness here will almost certainly feed into a stronger GBP/EUR.

"Even if the oversold conditions might lead to short-term rebounds in EUR/USD, the increasing monetary policies divergence between US and the Eurozone are expecting to push EUR/USD towards its strong support area between 1.2755 and 1.2662 in the longer-term," say Swissquote Research in a note to clients.

For the time being, countertrend moves should be capped by the resistance at 1.3444 say analysts.

Canadian Dollar: Support from BoC Ahead?

Looking at the Canadian dollar, we continue to see the potential for gains.

Canada's economy expanded by 3.1% in the second quarter, the strongest pace of growth since Q3 of 2011.  

Improvements in demand at home and abroad fuelled the pick up in economic activity with exports rising 17.8%.  

According to Statistics Canada "the quarterly growth was a result of increased economic activity in all sectors of the economy except non-profit institutions serving households."

"While USD/CAD extended its decline only slightly after the GDP report, the improvement in growth along with the uptick in retail sales and employment should make the Bank of Canada slightly less dovish," says Lien.

The BoC is not expected to change monetary policy next week but a more optimistic view could encourage further gains in the CAD.