Pound Forecast to Decline Further Against USD

The pound dollar exchange rate (GBPUSD) is forecast to remain under pressure in early 2015.

The GBP/USD took a fresh dip lower in January following news that the US economy grew faster than expected in the closing stages of 2014 confirming to markets that the Fed has scope to raise interest rates in the middile of the year.

As the below shows us the December side-ways trending range has been broken at the start of January.

As we move through February we see the pound to dollar exchange rate remains around the 1.53 level suggesting some near-term consolidation is taking place.

• For reference, the British pound to US dollar exchange rate (GBP/USD) is seen trading at  1.2532.

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A Poor Start to 2015 for GBP/USD

The British pound fell to a new 17-month low against the buoyant dollar after a weaker than expected reading of U.K. factory sector activity highlighted the view that the Bank of England will have plenty of time before raising U.K. borrowing costs.

The UK manufacturing sector ended 2014 coming in at 52.5 as December saw rates of expansion in production and new orders ease to the second slowest for over one-and-a-half years.

Rob Dobson at Markit tells us:

“The latest survey provides further evidence of the ongoing slowdown in the UK manufacturing sector, with output and new order growth easing to their second-weakest rates during the past year-and-a-half.

“Despite this end of year tapering, the sector still performed well over 2014 as a whole, with growth averaging at its highest since 2010.

According to Charles Purdy at Smart Currency Business the softer data could keep interest rates in the UK at historic lows for 2015:

"The UK saw encouraging growth indicators in the early part of 2014, but faltered in the latter part of the year. Given the Bank of England (BoE)’s
cautious stance on interest rates, we expect them to be raised slowly – if at all. Further falls in unemployment may increase the chances of a potential interest rate hike, but will not be the direct cause of such an action. Any indication that rates will rise before the end of the year will be GBP-positive."

Until we see signs that the Bank of England is ready to raise rates we doubt GBP/USD will find much support.

Sterling Supported at close of 2014

Sparking a nascent GBP recovery were the November MPC meeting minutes from the Bank of England that showed a variety of views on when UK interest rates should rise.

This has been added to buy a string of positive data sets in December which shows inflation is falling, wages are rising and UK consumers are opening their wallets.

We could well see the Bank bring forward their first rate hike from late to mid 2015.

US Dollar Hit by Overbought Conditions

Bank of America Merrill Lynch have reiterated that they remain confident the US dollar exchange rate complex will retain a positive bias longer-term, however, analysts note that in the near and medium term the USD is set to struggle and potentially correct lower.

Indeed, the euro dollar rate has already begun to correct higher (i.e USD lower).

"We look for this correction to continue in the weeks ahead towards 1.28/1.30. Above 1.2559/1.2578 should result in an upward acceleration. Back below 1.2416(week long channel base) warns that the larger bear trend is resuming more quickly than anticipated," say BofA.

This observation is important - because if the under-fire euro can eke out gains against the buck, then surely the more positively aligned British pound will also be able to take advantage of any USD weakness.

US Dollar Index Approaches Key Resistance

If we stand back and look at the US dollar as an individual financial product we see it could be about to run out of steam after an impressive run higher.

The observation is technical in nature. The US dollar index - derived from bunching the dollar's performance against a basket of currencies - shows it often fails to strengthen further from current levels:

For the sterling dollar exchange rate to fall any further we will surely need to see the USD index advance, any failure to do so will play into the hands of sterling.

As noted by Lucy Lillicrap at AFEX, this may well not be possible:

"The U.S. Dollar Index has reached a potential turning point with measured move objectives from prior base work arguably now being fulfilled.

"Combined with historic resistance from previous stalled advances (between 2008 and 2010) extending up to 89.50 this would suggest the formation of an intermediate top in coming sessions. Downside potential will then become readable towards 87.00 initially and possibly nearer 85.00 as well thereafter as part of a broad retracement to the past few months extended gains."

Longer-Term Forecasts: 2015 Should See Further Gains

That said, it would certainly be too early to call the end of the USD's bout of strength, particularly as we enter a year within which the US Federal Reserve is tipped to start raising interest rates.

Lillicrap tells us the dollar should ultimately move higher:

"If no peak of significance forms hereabouts and Dollar Index prices instead are able to push more or less directly higher (beyond 89.50) an extension to at least 92.50 is still achievable.

"The extent of base work already seen from 2008 through to this year, when a long term range break developed, is still sufficient to enable continued USD strength.
Indeed given the available compression pattern eventual extension targets of 100.00+ are feasible in any case even if such extreme levels require additional time to be realised.

"2014 has witnessed a broad sell-off in many currencies with USD/JPY leading the way. However a major top formation is still apparent above 1.2000 for EUR/USD with sufficient compression to force a sell-off nearer to 1.0000.

"On this basis 2015 should continue to witness Dollar Index strength in any case whether or not prices turn lower to digest gains already seen in 2014 first."

US Economy Grows Faster Than Expected

U.S. growth proved stronger than initially estimated last quarter, showing more of its underlying strength that has a Fed rate hike on the table.

The U.S. economy grew at an annual rate of 3.9 percent in the third quarter, up from the first estimate of 3.5 percent and better than forecasts to slow to 3.3 percent.

Faster growth bolsters expectations for a Fed rate hike next year, ultimately supporting the dollar as we move forward.