Pound Dollar Exchange Rate Held Below 1.63 Cap

The pound dollar exchange rate (GBP/USD) appears to have entered a new zone of trade which could dictate levels through the remainder of 2014.

The upper end of the range is defined by the 1.62 level and to the bottom we have the support points at around the psychologically significant 1.60. (See Goldman Sachs' latest exchange rate forecasts here).

As the below graph indicates, it is the support zone that appears to be the level that is most likely to come into play for the pound to dollar in the near term:

Note: The above image is periodically updated.
Note 2: All pound dollar exchange rates are taken from the spot market; your bank will affix a variable spread at their own discretion. To avoid the losses this entails ensure you deal with an independent FX provider. They will under-cut your bank's offer - in some instances this can deliver up to 5% more currency. Learn more here.

Why Has the GBP to USD Failed to Rise?

It has not been an easy week for the sterling exchange rate complex.

As analyst Joe Manimbo at Western Union notes these are good times for those with dollars who wish to buy the pound:

"Buying sterling today offers the assurance of one of the best markets in nearly a year. Sterling neared recent 11-month lows after downbeat news on U.K. consumers offered more evidence of an economy on the downshift.

"British retail sales underwhelmed with a 0.3 percent fall in September, confounding forecasts of a smaller decline. Weak data buy the Bank of England time to keep borrowing rates low, weighing on the pound."

Beware, more risk and uncertainty lies ahead for sterling with preliminary U.K. growth due Friday.

Forecasts suggest the UK will grow at a slower pace of 0.7 pct in the third quarter, down from 0.9 pct in the second quarter.

Will the Pound Sterling Recover?

I believe there are two issues to take note of in the immediate term for the GBP - the technical support level of 1.600 and the upcoming PMI data.

Firstly, as the image above shows, sellers appear unwilling to push the GBP/USD below 1.6 - many traders will have their take-profit level booked for these points and will be unwilling to wait for the extra impetus needed to push a break.

However, if upcoming data events are truly bad then we could see the trigger pulled to a break lower.

We see the next set of PMI releases, due at the start of November, as being potentially significant from this regard.

If markets are disappointed then we could well see a break and a quick run lower to the mid-1.550's.

Be aware though that markets are overly cautious on GBP at the present time - this could be to their detriment. The UK remains one of the best performing economies in the developed world and we reckon surprises could well be to the upside moving forward.

The US dollar: USD Strength still in Play

Of course, the USD side of the pound to dollar equation is incredibly important at present.

Those backing higher dollar rates found a usable number in the latest U.S. jobless claims.

The headline number increased to an in line with forecasts 283,000 from 266,000.

"But the underlying trend of improvement remained in place as the four-week average improved to the fewest since May 2000, falling to 281,000. Today’s claims were a good sign for future hiring, keeping a Fed rate hike in play for 2015," points out Manimbo.

UK GDP Data Prompts Consolidation

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," says Boris Schlossberg at BK Asset Management.

For now however there is nothing in the UK data to indicate that BOE is about to shift its policy stance and that means that cable will remain rangebound for the time being. "The pair traded to a high of 1.6070 in the wake of the announcement but then retraced back to 1.6030 as it continues to consolidate above the 1,6000 figure," says Schlossberg.