UK GBP/USD Forecast: GBP/USD Unlikely to Reach an Exchange Rate of 1.72 Again in 2014

This week has already been a volatile one for the UK currency - on Monday we saw a Carney-inspired rally; the Bank of England governor continues to blow hot and cold when it comes to guiding markets towards the UK's first interest rate rise.

This is the key driver at present which was confirmed in the mid-week session with the release of the August Bank of England minutes. 

Either way, the GBP-USD rate has come under pressure in the late summer period as upside momentum runs out of steam; indeed it would take exceedingly excessive positive economic data surprises to continue feeding the kind of gains witnessed during the first half of the year.

A correction has thus set in, add to this an improving US economy and we can understand why the sterling dollar rate has struggled of late.

• At the time of this article's last update the pound to dollar exchange rate (GBP/USD) is 0.02 pct lower on a day-to-day basis at 1.6592.  We saw significant falls on Tuesday after weak inflationary data added fresh pressure to the GBP.

Please Note: All quotes here are taken from the wholesale markets. Your bank will affix a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX.

Is this correction lower likely to extend?

According to Lucy Lillicrap at Swissquote Bank the GBP-USD could find some further upside, however gains would likely be capped:

"Sterling is clearly under some pressure as various crosses correct previous gains but no evidence exists to suggest an important long term top has been posted in GBP/EUR for example or elsewhere. Given the strengthening U.S. Dollar environment and presence of historic selling pressure over 1.7000 it may prove difficult for GBP/USD prices to exceed 1.7200 going forwards but declines here are still viewed as part of an ongoing broad range."

US Dollar Forecast to Gain

The US dollar meanwhile continues to benefit from improving sentiment and upgraded forecasts amongst major analysts.
Indeed, Lillicrap reckons the GBP to USD is currently forming a new range:

"A combination of improving U.S. Dollar technical readings and Sterling cross rate (corrective) weakness has pushed values sharply lower in the past month or so.

"This retracement is already sufficiently established that no direct breach of prior 1.7200 area peaks appears likely but oversold daily readings also suggest some support will soon emerge to reduce downside pressure going forwards again.

"On this basis expect GBP support at 1.6625 and then 1.6475 areas and whilst rebounds are initially capped by resistance around 1.6850 effective selling pressure is now restricted until nearer the psychological 1.7000 level again. Looking further ahead technical studies imply a fresh range is taking shape with 1.6750 or so acting as the pivot point."

Sterling strength worries UK aviation business

The current downtrend in the GBP/USD may not be welcome news for holiday makers, however for exporters it is most welcome.

According to one brokerage sterling strength has been a thorn in the side of UK companies selling abroad, and UK aviation businesses are no exception.

Businesses that receive payment in US dollars – as is widespread in the aviation industry – have suffered from unfavourable exchange rates of late as a result of a relatively strong sterling.

Even businesses like BAE systems and Rolls-Royce – both household names – have not been immune to unfavourable currency fluctuations.

“Unfavourable exchange rates don’t just diminish profits – they also present opportunity costs that can have knock-on effects on other aspects of a business,” says Alex Bennett, Aviation Business Expert at international payments specialist Smart Currency Business. “These can stunt growth and, in worst case scenarios, lead to significant financial losses for a business.”

“However, currency costs can be managed to some degree in order to minimise losses and mitigate risk on currency exchange. Aviation businesses need to understand the consequences of currency fluctuations, know their budget rate, split risk up into transaction and economic risks, and identify practical solutions for minimising currency costs that eat into profits.

“A practical solution for cutting down on currency costs is by hedging. There are different kinds of hedging strategies, but a popular method allows a business to set a current rate for future use. This allows the business more control when it comes to budgeting and converting currency.”