Next Targets for Pound-to-Dollar Rate: 1.35 Next?

We ask analysts where they see the GBP/USD exchange rate going next now that it has triggered a fresh one-year high.

The Pound-to-Dollar exchange rate has reached a fresh one-year high in early mid-week trade having hit 1.3314 on the spot markets in late Asian trade.

The latest impulse higher comes after the release of the latest batch of UK inflation numbers which show UK inflation is now threatening to hit 3.0%.

Consumer price inflation rose at an annual rate of 2.9% during August, according to the latest Office for National Statistics data, a pace rarely seen since the onset of the commodity price downturn in 2013 and the subsequent period of disinflation.

Broad-based increases across the price basket, but particularly in the clothing and footwear segments, were behind the move that has now led markets to bet Bank of England policy makers will take a more hawkish line in their Thursday rate statement.

Price chart showing GBP/USD at daily intervals. Source: Netdania.

“Given the inherent scope of month-to-month price changes to cause volatility in the annual inflation rate, it is not clear that, by itself, this upside news will sway any MPC votes this time around,” says RBC Capital Markets economist Sam Hill. “Nevertheless, as we highlighted in our MPC preview last week, there could be ‘a hawkish tinge to the minutes’ on Thursday.”

The debate around BoE monetary policy met with a bend in the road during first week of September, with economists at Berenberg and MUFG pointing toward a possible rate hike during the months ahead.

We also reported recently a noted strategist at UBS to be anticipating a rate cut in coming months. This view is however looking to be an outlier.

The BoE has spoken before of the need to balance its mandate to target inflation of 2% with its other mandate to create the conditions necessary to support growth.

Inflation that threatens the 3% level might just be enough to bring about a change of rhetoric Thursday, which is propping up the Pound against the rest of the G10 basket, although the jury is still out on whether the Bank of England would actually hike rates in the current environment.

“With mixed signals on the strength of the economy, and the majority of the MPC appearing to be comfortable with a temporary, exchange-rate driven pick-up in headline inflation, we don’t think that the MPC will be panicked into raising rates imminently,” says Paul Hollingsworth, a UK economist at Capital Economics. “But the first hike is still likely to come before markets expect.”

The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the BOE by year end.

The market now expects a 30% chance of a hike in December, this compares with 20% a week ago.

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Next Targets for the Pound-Dollar Exchange Rate

Markets appear to be pricing themselves for the prospect that the Bank does bring forwarad the first interest rate rise in light of the recent jump in inflation.

What are the next likely levels?

"Overall, the structure is now constructive, favoring an eventual push into the 1.3500-1.4000 area over the medium-term, but short-term, we still could see some more choppy consolidation," says LMAX Exchange in a recent briefing to clients.

Commerzbank's Karen Jones observes GBP/USD has eroded the 1.3267 August high, this was also the approximate 50% retracement of the move down from June 2016 (1.3255).

"This was key resistance and the close above here should be enough to trigger another leg higher to the 1.3443/6 September 2016 high," says Jones. 

Analyst Robin Wilkin at Lloyds Bank meanwhile cautions that, "medium-term, we still see the upside as limited, but need more evidence of a top for a pullback towards 1.27-1.25".

"We are monitoring price action to determine whether the 1.1490 "flash crash" move was a significant low, or not. Either way we expect prices to remain in a medium term range (currently a 1.25-1.35 parameter)," he adds.

Fawad Razaqzada at Forex.com says if the buyers hold their ground above this 1.3222-1.3263 area, then we may see further range expansion to the upside later on this week.

"The next bullish objective is at 1.3395, the 127.2% Fibonacci extension level of the last corrective downswing in August. The 161.8% extension of the same move comes in at 1.3565, which stands just above the now breached 2009 low of 1.3505 level," says Razaqzada.

As well as prices making higher highs and higher lows since that post-Brexit flash crash, the moving averages are in the correct order too, now.

"With the 21-day exponential moving average moving above the rising 50-day simple moving average, which itself resides above the rising 200-day average, the trend is indeed objectively bullish," says Razaqzada.