GBP/USD Exchange Rate (GBP/USD) Forecast to Hit 1.65: But Watch the Support Levels Says Analyst

The summer downtrend in the pound to dollar rate was momentarily broken ahead of the Bank of England's Quarterly Inflation Report (QIR) mid-week, "but Governor Mark Carney laid waste to that rally and shoved it back below said broken trendline as well as previous support near 1.67," says a technical forecast from Forex.com in the wake of the QIR.

• Ahead of the new week the pound to dollar exchange rate (GBP/USD) is quoted at 1.6697.

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The Sterling Dollar Rate Could Hit 1.656 Say Forecasters

The next significant level of support that could pause the downtrend is seen at 1.66 suggest currency charts while fundamentaly speaking the latest QIR is bearish for the pound's outlook as it pushes down UK sovereign bond (gilt) yields.

"The decline in UK 2-year bond yields, which are sensitive to changes in monetary policy, has also weighed on the pound on Wednesday. The 2-year yield has fallen 10 basis points, which may not sound like much, but for bond yields this is huge," points out Kathleen Brooks at Forex.com.

The 2-year yield is at its lowest level since mid-June, before Mark Carney made his comments about the prospect of sooner than expected rate hikes in his Mansion House speech to the City of London.

The decline in 2-year UK yields, has pushed the spread between UK-US yields lower which could lead to further losses in GBPUSD as the UK's yield advantage is eroded.

"The break below 1.6740 - the 61.8% retracement of the March – July advance - was a bearish development that could trigger further losses back to 1.6556 – the April 4th low," forecasts Brooks.

But, the US Dollar Rally Could Start to Weaken Now

The losses in the pound dollar exchange rate would have been worse were it not for some soft US data.

An anaemic consumer spending report combine with this month's disappointing non-farm payrolls release to leave Federal Reserve Chair Janet Yellen comfortably dovish.  

This will keep the dollar buyers at bay and should slow the rally we have seen in the USD over the course of the summer.

"We know that the central bank is reluctant to tighten monetary policy early and the latest U.S. economic report hardens their resolve to leave rates on hold for a long period of time after Quantitative Easing ends," says Kathy Lien at BK Asset Management.

Keep an eye on US sovereign bond yields as their recovery will be an important driver of further USD expansion. Lien notes:

"For the most part, the market's appetite for U.S. Treasuries and equities keeps demand for dollars intact.

"While the pace of U.S. growth leaves a lot to be desired, the outlook for the U.S. economy is still brighter than the Eurozone and other parts of the world.  Eventually the downtrend in U.S. yields will come to an end but its not over until it is over."