FX Outlook: British Pound, Euro, US Dollar Exchange Rates For the Medium- to Long-Term

At the time of writing the following rates are observed:

• The pound to euro exchange rate is 0.08 pct lower on a daily basis having reached 1.2559.
• The pound to dollar exchange rate is 0.06 pct lower at 1.7155.
• The euro to dollar exchange rate is 0.20 pct higher at 1.3659.

Please be aware that the above mid-market quotes are subject to a discretionary spread levied by your bank when making international payments. An independent FX provider will however seek to undercut your bank's offer and in some instances can deliver up to 5% more currency on execution. To learn more, please read here.

Outlook for GBP remains bullish, but has the currency risen too far?

Sterling has been pushed to twenty-two month highs against the euro and six-year highs against the US dollar as better than expected manufacturing and construction data cements the belief that UK interest rates will increase sooner rather than later.

"These new levels could provide a good opportunity for businesses to lock in an excellent budget price for the year ahead. Meanwhile sterling buyers may wish to consider the future impact this will have on their profit margins," says Carl Hasty at Smart Currency Business.

However, Greg Anderson at BMO Capital warns that the GBP may be over-extended at this time:

"The move in GBPUSD represents a new cycle high but the fact that shockingly good data can’t take GBP higher may be a sign that the market can’t get much longer."

Lloyds Bank Research also believe the pound could be at extended levels, "GBP valuations do look a little stretched, and it certainly looks as there is plenty of speculative long GBP positioning being held."

From a medium term perspective, Lloyds say it seems unlikely that the UK will continue to outperform the growth outcomes in the US and Eurozone indefinitely, so these levels may well prove a good longer term hedging opportunity.

"However, for today the short term uptrend can probably be sustained by a solid UK construction PMI reading," say Lloyds.

Further guidance on the pound dollar rate is provided by the team at Swissquote Research who eye the following technical levels:

"GBP/USD is close to the major resistance at 1.7043/1.7063. The current succession of higher lows favours a bullish bias. An initial support lies at 1.6997 (intraday low).

"Hourly supports stand at 1.6953 and 1.6923 (18/06/2014 low). In the longer term, an eventual break of the major resistance at 1.7043 (05/08/2009 high) is favoured as long as the support at 1.6693 (29/05/2014 low) holds. Other resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low)."

Concerning the outlook for the euro dollar rate, Swissquote tell us:

"EUR/USD continues to move towards the high of its horizontal range defined by 1.3503 and 1.3677. Monitor the test of the hourly resistance at 1.3644/1.3651. An hourly support lies at 1.3565 (20/06/2014 low, see also the 61.8% retracement).

"In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. The long-term downside risk implied by the double-top formation is 1.3379. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low)."

US interest rates will be key for exchange rate outlook

So what should we keep an eye on when determining exchange rates in the current environment?

According to BK Asset Management's Boris Schlossberg the answer lies with US interest rates:

"We continue to believe that near term price action in FX will be driven primarily by US rates. Last week the greenback took a hit as the 10 year yields slid towards 2.50%, but for now that level appears to be support and if bonds yields could stabilize and rally from that base the dollar will firm up as the week proceeds.

"The market appear to be torn between the surprisingly weak US economic data in Q1 of this year and the seemingly stronger evidence of growth in the most recent economic reports.

"If this week's data could surprise to the upside it could tilt the sentiment towards the buck and the early profit taking in the commdollars could spread through the full G10 complex."

European data has been on tap for those watching the euro exchange rate at the start of the new week.

German retail sales showed yet another miss at -0.6% vs. 0.8% eyed while in UK the mortgage approval data was right in line at 62K.

Both currencies essentially ignored the data with EUR/USD holding its levels at 1.3650 while cable remained abound 1.7025.

"Euro and pound may see some further adjustment on end of month flows today, but action is likely to be quiet as traders gear up for the major event risk later in the week with both the ECB meeting and US NFPs falling on the same day," says Schlossberg.