Outlook for the British Pound into Year-End: Strength vs US Dollar to Continue?

The British pound exchange rate complex (GBP) enters the mid-month session on a firm footing against most currencies.

We do however note that the euro has strengthened over the course of the recent week and sterling could well lose further ground.

The US dollar is struggling alongside global stock markets - signs of softening investor sentiment is being taken by traders as a sign that the US Federal Reserve may be forced to push back their first interest rate rise.

It is the expectation of higher interest rates in the United States that has pushed the dollar up against the British pound through the course of 2014.

Any signs that this trend could end will be a boost for the pound to dollar exchange rate.

The Outlook for the Week Ahead

The upcoming week is expected to be the last of significance for currency markets ahead of the holiday season.

"Better bid, GBP/USD tests Friday high of 1.5747 at the time of writing. The candle pattern analysis print a formation to bullish engulfing (conviction 5/9) signaling a short-term bullish reversal pattern. Option bids trail above 1.5700 and will likely give further support today," says Ipek Ozkardeskaya at Swissquote Bank.

However, we are heading into an event-full week in GBP with CPI, jobs data and retail sales a due on Tuesday, Wednesday and Thursday respectively. Soft economic read is a risk for GBP-bulls; key support stands at 1.5542 (Dec 8th low).

Greg Anderson at BMO Capital tells us what to expect:

“Next week is a big event week for the UK, but we expect it to be a mixed bag for the GBP.

“Tuesday and Wednesday will provide the most anticipated data.

“Tuesday has the release of November CPI data and the results of the BoE’s stress tests. (Update: CPI falls faster than expected having hit 1%).

“Wednesday brings labour market data and December MPC Minutes. The stress tests focused on how resilient the UK’s financial sector is to a slump in house prices and higher interest rates.

“Even if the results don’t contain any particularly alarming news, if they suggested higher imposed capital requirements, that would a negative for bond yields and bank equity prices, which could weigh on the GBP.

“The MPC minutes for December shouldn’t be a huge market mover.

“We would be very surprised if the two hawks on the MPC switched their votes from ‘hike’ to ‘on hold’ before Q1.”

Pound Forecast to Break Lower Against US Dollar

The 1.5800/50 range in GBPUSD should act as good resistance next week.

Support is provided by the 1.56 level.

“We see it as only a matter of time before GBPUSD breaks firmly and semi-permanently below 1.5600,” says Anderson.

Economic Conditions Pointing to Need for UK Interest Rate Hike

News from the financial information providers Markit strikes us as being relevant before we hear from the Bank of England this week.

Markit reckon that the UK economy is growing at such a pace that the markets may be under-estimating just how soon an interest rate hike may come:

“The construction sector has grown faster than previously thought so far this year, and especially in the third quarter, adding further to signs of a booming economy.

“Survey data suggest the sector is continuing to enjoy further robust growth in the fourth quarter.

“The data will be a concern to those policymakers who are worried that the amount of slack in the sector is being reduced to an extent that could drive up inflationary pressures, therefore adding to calls for earlier rate rises.”