British GBP/USD Rate Forecast: GBP/USD Under Pressure in the Short-Term, Cap to Gains Forms

Indeed, one analyst we follow is forecasting a top to have formed on the recent GBP/USD rally based on a technical analysis of recent price action.

The pound dollar rate is quoted at 1.6970 at the time of writing.  USD strength remains pervasive and is the main driver of currency markets right now and a break below 1.700 will concern GBP bulls as this is a key psychological technical level of support and resistance.

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Bank of England and the recent decline GBP

Woes for sterling started mid-week when the BoE MPC Minutes revealed the Committee voted unanimously to leave monetary policy unchanged.

The tone of the minutes was quite balanced. On the one hand, they viewed the risks of a bank rate rise derailing the recovery as having receded.

However, on the other they voiced concerns about the weakness of inflation and risks to asset prices of a pre-emptive policy tightening.

"With nothing particularly hawkish from the minutes, the mildly corrective tone in GBP resumed," say Lloyds Bank Research.

Market focus will turn to UK retail sales this morning. The market is expecting a slight rebound of 0.3% m/m after the drop in May.

"But given the sentiment towards GBP has softened recently, the absence of an upside surprise today will likely see GBP continue trade with a heavy tone, but we suspect downside will be limited ahead of tomorrow’s first estimate of Q2 GDP," say Lloyds.

UK sterling: Public sector finances fail to inspire

Also faliling to inspire pound-buying were the UK Public Sector Net Borrowing figures which showed a bigger deficit than expected at 9.5B vs. 9.2B predicted.

"More importantly the prior month's results were all revised to show higher than expected deficits suggesting that despite the strong growth in UK economy fiscal spending remains a serious problem. UK public sector net debt ex financials now stands at 77% of GDP - the highest on record," says Boris Schlossberg at BK Asset Management.

According to Schlossberg the news may give the BoE pause with respect to consideration of any monetary tightening as any hike in rates will increase the UK government's cost of borrowing and only contribute to the deficit.

The focus for the pound this week will be the BoE minutes with traders eager to see if any MPC members has moved to a hawkish stance.

"Cable for now remains capped at the 1.7100 mark with the pair consolidating in tight 1.7060-1.7080 range for the past two days. If consensus view shifts to the idea that BoE will not hike before 2015, the pound could be in for further profit taking as the day proceeds," says Schlossberg.

Forecasting the end of GBP's gains?

Karen Jones at Commerzbank has analysed recent price action in GBP/USD and is forecasting the formation of a potential top to gians:

"GBP/USD is under pressure in its range and we are viewing this as the market building a potential expanding top. The outlook remains negative while capped by 1.7205. The recent high has been accompanied by a large divergence of the daily RSI – this reflects a loss of upside momentum and overhead lies the major resistance at 1.7300/31 – both of which suggest a more negative stance is required. This resistance is a combination of a Fibonacci extension and the 50% retracement at 1.7331 (of the move down from the 2007 peak).

"Current trade: Short 1.7103. Recommended Trade: Add 1.7110, 1.7125, stop 1.7205. Exit 1.6900."

Meanwhile, Camilla Sutton at Scotiabank is of the opinion that stability is theme of the moment for GBP/USD:

"GBP is relatively stable, trading close to yesterday’s NA close after a quiet session. Each day GBP is leaking lower with support provided by the psychologically important 1.70. A soft CBI trends report today wasn’t enough to shake markets leading into Wednesday’s MPC minutes and a speech at the Commonwealth Games Trade and Investment conference."