Pound Dollar Exchange Rate on the Cusp of Key Support Level

The pound to dollar exchange rate (GBP/USD) failed to receive a boost from foreign exchange traders in the final session of the week after UK GDP data came in-line with expectations.

What does the outlook hold for the sterling dollar pair? According to analysts at RBS (see below), stopping the next round of the USD rally will be a tough ask and those with requirements on the exchange rate should take caution.

The GBP/USD rate is 0.01 pct in the red at 1.6163 as we near the end of October.

If you are hoping for a higher rate, or have a rate below which you can't afford to go, ensure your FX provider has the correct buy and stop-loss levels in place.

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Pound Rate Today: Retail Sales Shocker, GDP On-Target

On the economic front the UK GDP figures printed at 0.7% as expected and cable staged a mild relief rally as some traders feared that the recent slowdown in activity could translate into lower growth figures. The preliminary data showed that production rose by 0.5% versus 0.2% the period prior but services slowed to 0.7% from 1.1%.

The slowdown in activity reflects the tepid demand conditions in EZ as whole, but on that front there was some positive news as GFK Consumer data out of Germany showed an uptick rising to 8.5 from 8.1 expected. The latest data from Europe indicates that conditions have stabilized and may actually improve into the year end as the shock of geopolitical tensions with Russia begins to wane.

The pound sterling came under pressure mid-week when it was revealed UK retail sales have fallen faster than expected giving rise to concerns that the UK economy has started to cool.

This will bring joy to the doves at the Bank of England who are on the look-out for any reason to keep UK interest rates held low for as long as possible.

Markets know this and as such are pushing the pound back to match these interest rate expectations.

RBS: The USD Dollar Will Rally Anyway

Fresh on our desk from RBS exchange rate analysts is the viewpoint that the US dollar will likely continue rising.

RBS analyst Greg Gibbs at RBS says:

"The fall in US rates in the last month appears excessive in light of the on-going strength in US economic data. A key factor driving down US rates was the strength of the USD (several key Fed members highlighted that the strong USD and weaker global growth may delay policy tightening in the US).

"Even though we may be in a low global rates environment for a long time, the US economy is set to be a growth leader and is within sight of reaching its full employment mandate.

"Low commodity prices and low long term yields will tend to support US consumer and housing demand.

"It is possible to imagine a scenario where the Fed does not raise rates much over the year(s) ahead, but this is likely because it will be forced to allow a stronger USD do the effective policy tightening needed. Many stronger countries over recent years have had to accept lower rates than expected and compared to previous cycles because of the strength of their currencies.

"As such, we expect to see the USD rally even if its yield advantage does not improve much."

Dollar supported by (slightly) higher US CPI

We hear from analyst Piet Lammens from KBC Markets concerning recent action in the dollar, euro and Japanses Yen:

This morning, the euro remained slightly under pressure as the debate on ECB corporate bond buying continued. EUR/USD came under additional pressure due to rumours that at least eleven banks failed for the ECB stress test (AQR).

The euro decline/dollar rebound slowed early in the US. However, the dollar regained pole position as the US CPI was slightly higher than expected.

Overnight, Asian equities profited from the impressive rally in the US yesterday evening.

USD/JPY had a decent run yesterday, but the pair still struggled to regain the 107 handle and there were no additional gains this morning.

EUR/USD held in the 1.2725 area. The correction low at 1.2706 was almost tested, but a break didn’t occur at that point in
time.

There was little hard news during the morning session in Europe. ECB Coene said that the ECB had no concrete proposal to buy corporate bonds.

At the same time he admitted that a wider range of instruments could avoid that the ECB would have to pay very high prices to reach its target for balance sheet expansion.

"So, it makes sense. In technical trading, EUR/USD was already under moderate pressure and the decline accelerated on a press report that at least 11 banks will fail for the stress tests, to be published on Sunday," says Piet Lammens at KBC Markets.

French PMI Data Keeps a Lid on EUR

PMIs from France were weaker than expected, slipping further in to contractionary territory in October. However, the German numbers were surprisingly strong with the manufacturing index rebounding firmly after falling below 50 in September.

This helped provide some support for EUR/USD; however, market moves were marginal.

There is little on the calendar today that looks likely to trigger much market reaction. With Eurozone aggregate PMIs coming in firmer than expected, this should somewhat temper market concerns about weaker Eurozone growth.  

"However, with EUR still being viewed as a funding currency, a continuation of improving risk sentiment will likely weigh on EUR/USD. Furthermore, the market will likely have an eye on Sunday’s release of the AQR and stress tests results. Uncertainty surrounding the results and the likely market reaction will limit attraction towards EUR," say Lloyds Bank Research.

EUR/USD dropped below the 1.27 barrier.

Those headlines also pushed European equities back in the red.

USD/JPY was little changed in the high 106 area. In the US the focus was on the September inflation data. The dollar lost a few ticks in the run‐up to the publication of the CPI report.

Headline inflation was slightly higher than expected (unchanged at 1.7%). The deviation from consensus was minor, but currency markets were apparently positioned for a downward surprise (USD short).

This didn’t materialise and the dollar was squeezed a bit higher. EUR/USD set a minor correction low in the 1.2665 area. USD/JPY tries to regain the 107.00 level in a sustainable way.