GBP-USD to Fall say Barclays in pre-Election Forecast

A new forecast on the pound to dollar exchange rate (GBP-USD) from a leading investment bank and research house confirms more losses lies ahead.

“Consistent with our technical strategist’s bearish GBPUSD view, we recommend selling GBPUSD spot." - Hamish Pepper @ Barclays.

Barclays have told clients that GBPUSD is likely to come under increasing downward pressure as investors sharpen their focus on pronounced UK political uncertainty in an environment of broad USD strength.

The lead driver for the forecast weakness is thus political in nature.

However, there are two other factors that will aid the move lower: i) relative Bank of England v US Federal Reserve monetary policy, and ii) technical indicators confirm momentum to the downside remains entrenched.

As we enter the first full day of trading of the week we see the British pound to dollar exchange rate is trading at 1.4899.

Please note that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.

Why the Pound Sterling is Predicted to Fall

Politics

The UK is entering a highly uncertain political cycle.

Just days ahead of the crucial May 07 polling day we see there is no clear winner being hinted at by the opinion polls.

Currency markets hate uncertainty and this dead heat between Labour and the Conservatives suggests uncertainty is the only certainty.

“The resultant range of market implications is broad, including prolonged political deadlock, snap elections, an EU referendum and variations on the fiscal consolidation path, which is important for the pace of Bank of England (BoE) policy normalisation,” says Hamish Pepper at Barclays.

Barclays believe post-election is not fully priced by the FX markets ensuring the prospect of further increases in implied volatility is likely to be an additional GBPUSD negative.

Bank of England v US Federal Reserve

Monetary policy, as dictated by global central banks, remains the long-term fundamental driver of currency valuations. (How? see our infographic here).

The US Fed is priced by the US dollar to be on track to begin raising rates in September.

By contrast, Barclays think there are growing risks that BoE policy could remain unchanged beyond this year.

It would appear UK inflation could stay ‘lower for longer’ owing to recent trade-weighted currency strength, combined with lower energy prices, adds further downward pressure to UK inflation.

Indeed, BoE rhetoric has recently indicated increasing division within the Monetary Policy Committee (MPC) and there will be little to change this perception over the next month.

Furthermore, with the dissolution of parliament on 30 March, the BoE is now bound by “purdah” rules, which prevent central bank communication until the final election results are known.

Technicals

The technical forecast – ie. Those predictions made on the basis of past performance shown on the technical charts – confirms momentum in GBP-USD remains negative.

Essentially, the path of least resistance is lower, and technical traders looking to profit on established trends will see no reason to fight the current moves.

Barclays technical strategists remains bearish GBPUSD and expects resistance in the 1.5170 area to provide selling interest for a move below 1.4630, the year-to-date lows.

“Consistent with our technical strategist’s bearish GBPUSD view, we recommend selling GBPUSD spot (reference: 1.4902) targeting 1.4050, above important technical support, with a stop loss at 1.5180, above recent range highs,” says Pepper.

Currency Markets: USD in Broad Declines

The short-term picture is once of dollar weakness.

The release of US Payrolls ahead of the long weekend showed the rate of job creation in the US to be much weaker than expected.

This prompted a bout of USD declines.

“While the disappointing payrolls report is likely to be temporary - owing to the bad weather - it prompted a pare back in market rate hike expectations and 2year US yields have sustained the falls. This should keep the USD under pressure today,” say Lloyds Bank Research.

Focus is likely to shift to FOMC minutes tomorrow given Yellen’s comments on the USD at the March FOMC press conference.

For today, UK services PMI may attract some interest.

GBP/USD is likely to remain somewhat supported owing to the softer USD tone.

For GBP/USD, the 1.4795/1.4810 area should provide good initial support beyond that the 1.4750 area. On the topside, the 1.4985/1.5025 should provide good initial resistance.