FORECASTS: British Pound to Halt, US Dollar has Advantage and Euro Predicted to Struggle on Exchange Rate Markets

The pound sterling was the biggest advancer on global exchange rate markets at the start of the week but is due a pause after Wednesday's good employment news masked underlying weakness in wage growth.

Indeed, the positive tail-winds of strong economic data will start to ebb as the economic reporting cycle in the UK dries up for the month.

Friday's exchange rates for reference

• The pound to euro exchange rate is flat on a day-to-day basis at 1.2642.
• The pound to dollar exchange rate is flat at 1.7105.
• The euro dollar rate is unchanged at 1.3531.

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The British Pound Pops Higher, More Gains Forecast Longer-Term, Pause Near-Term

In the mid-week session traders digested news of another fall in UK unemployment to 6.5% confirming the underlying economic picture in the UK will continue to favour GBP.

However, one analyst is forecasting a near-term pause on the back of news in the same report that wage growth in the UK remains under pressure. Lloyds Bank Research say:

"The weakness of wage growth was once against the main weak spot in the data, and with wage growth at 0.3% y/y (including bonuses), the lowest y/y rate since 2009,  it’s very hard to see the MPC concluding there is any inflation danger brewing in the labour market.

"While there are other reasons why some may see a need for higher rates (e.g. housing market strength) these are unlikely to be enough to gain majority support.

"So for now GBP strength may need to pause until there is some evidence of genuine inflation pressure. Momentum seems to be flagging both against the USD and EUR."

Will inflation determine the pound's outlook?

The British pound soared against the dollar and the euro after U.K. inflation unexpectedly surged to its fastest annual rate since January last month.

Sterling has since rallied back toward a six-year peak against the U.S. dollar and a 22-month peak high against the euro.

Concerning the pound sterling's bullish prospects, Omer Esiner at Commonwealth Foreign Exchange tells us:

"The jump in inflation is particularly supportive for the pound as a generally low inflation backdrop in the U.K. had been seen as giving the BOE some cover to hold off on raising borrowing costs sooner rather than later.

"With nearly all sectors of the nation’s economy (separate data overnight showed London home prices jumped by a record 20.1% in the past 12 months) accelerating, there is now little doubt that the BOE will lead other major central banks in hiking borrowing costs, possibly as soon as the end of this year"

The pound should continue to find support, especially if upcoming U.K. data, particularly today’s employment report, confirms the outlook for a BOE rate hike in 2014.

Euro exchange rate: Where next and what matters? 

The euro remains subdued at present with a lack of strong economic data being reported and renewed worries about Banco Espirito Santo, Portugal’s largest bank.

With regards to the outlook, for the euro it is becoming increasingly apparent that local data releases are of little importance.

According to Kathy Lien at BK Asset Management the path of the currency will be dependent on the market's appetite for U.S. dollars and the divergence in the performance between Eurozone and U.S. yields.

Technical forecasters are meanwhile telling us that for the euro dollar exchange rate the longer-term outlook remains challenged.

Luc Luyet, a technical analyst at Swissquote Research tells us:

"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. A long-term downside risk at 1.3379 (implied by the double-top formation) is favoured as long as prices remain below the resistance at 1.3775.

"Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low)."

The dollar exchange rate: No Help from Yellen, tight ranges forecast for EUR/USD

The U.S. dollar is stronger across the board as we head into the final sessions of the week. With the Yellen testimony out of the way markets will go back to watching economic data.

"Yellen provided absolutely no guidance on when rates would rise and despite the rally in the greenback, the general tone of the FOMC statement was dovish," says Kathy Lien at BK Asset Management.

Lloyds Bank think EUR/USD looks unlikely to break out of the recent 1.35-1.37 range.

Emmanuel Ng at OCBC Bank says, "amid the summer doldrums, EUR-USD may be tempted lower in the near term given the current dollar backdrop with the 55-day MA (1.3656) expected to cap while interim support is also expected into 1.3530/50. In the interim, we remain directionally uncommitted."