Pound / Dollar Forecast: The Rally Higher to Hit a Wall

Our forecast suggests the strong move higher in the pound to dollar exchange rate (GBP-USD) could soon be due a pause.

The pound sterling has in just over two weeks climbed significantly against the dollar from GBP/USD 1.45 to almost 1.55.

We can safely say the pair has been unaffected by pre-election uncertainties, although we do caution that this could yet occur as the outcome is made clear.

Electoral speculation aside, the main driver behind sterling-dollar is the USD at the present time. 

The dollar was sent lower in late April after US data showed the economy grew at a measly 0.2% in the first quarter of the year.

The dollar was further undermined when the US Federal Reserve indicated it was in no rush to raise interest rates.

The exchange rate rose swiftly from GBP/USD 1.5328 to 1.5498.

Can the gains continue?

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Resistance Ahead Now Forecast

The pound v dollar exchange rate has been running higher since early April, barely pausing for breath.

The move saw the pair finally break above the 100 day moving average, represented by the red line below.

The above graphic hints at two important issues concerning the outlook: 1) The recent rally higher is looking a bit stretched and is due to stall. 2) The resistance line at 1.5530 looms large.

British pound gains were halted here back in March - will the same apply in May?

We get the sense that profit-taking on the GBPUSD recovery could well occur in the run-up to this level. While we forecast further British pound strength any gains will likely come at a slower pace.

It is worth noting that the meeting of the resistance level at 1.5530 coincides neatly with the UK election which is a mere few days away.

A big Move Lower?

Interestingly, analysts at Intesa Sanpaolo warn that they are predicting a major correction lower in GBP-USD.

A note from analyst Asmara Jamaleh says, “We confirm our expectations for a correction of the exchange rate on a 1m horizon, to GBP/USD 1.45-1.44.”

That said, this would be a bottom to the Italian bank’s exchange rate forecast profile.

In three months 1.50 is forecast, 1.53 in 6 months and 1.57 by this time next year.

Why the US Dollar is Lower

The markets have undergone a massive realignment with regards to the once unquestionable USD bull run.

“April’s FOMC statement reaffirmed the fact that US economy has clearly slowed in Q1 and rather than look through that weakness the Fed will now wait for confirmation of pick up before committing to normalisation,” notes Boris Schlossberg, trader at BK Asset Management.

The rate hike in June is out of the question and one in September is now in doubt.

Only when data starts firming, and expectations for the first interest rate rise are solidified, will we likely see the USD rally commence.

That said, we don’t see much cause for a massive extension of the current USD sell-off, particularly until the US employment data due next Friday is released.

This should confirm whether the US economy really is slowing down, until then we would expect any USD weakness to be gradual in nature.

Barclays Present a More Positive Case for the USD

Interpretation to the US Fed’s April meeting is key.

Barclays believe the chance of a September interest rate hike is high, if this scenario were to be correct then don’t expect any major USD weakness.

“In our view, the lack of any specific calendar time suggests June will be a “live” meeting, where rate hike deliberations will begin in more earnest. Our view remains that September is a more likely time for the first rate hike, but we expect several on the committee to argue for a rate hike in June,” says Michael Gapen from Barclays.

Arguing for an earlier June hike would likely be Richmond Fed President Jeffrey Lacker, who is a voting member in 2015.

“Fed guidance about rate hikes after mid-year has been a staple of recent FOMC communications, and we read the statement as consistent with this messaging,” says Gapen.

So all is not lost for the USD bulls, we would expect strength to resume towards the second half of the year; as such we see these as decent levels for those holding pound sterling to sell into dollars.