Lloyds Cut Back on 2016 Forecasts for GBP/USD Conversion

The British pound to dollar exchange rate is well above its year-end 2015 and year-end 2016 forecasts held at the UK’s leading financial service providers.

Lloyds Bank have confirmed to us that they see a notably lower GBP / USD exchange rate ahead.

The call comes following a three month run of gains made by the pound sterling which have taken the market back above 1.57 offering relief to those with outstanding USD payments.

A strong set of UK data released over the course of June has given the pound a renewed sense of purpose while the dollar was torpedoed mid-June by a less-than-enthusiastic US Federal Reserve that appears to be dragging its heals over raising US interest rates.

The moves are significant, in June alone the rate has fluctuated by 5% from its lowest to highest point meaning that those who mis-timed their international payments could have cost themselves £5000 for every £100000 transferred.

There is even more currency at stake if we consider what could potentially lie in store in coming weeks and months.

Bond v Bond Battle Sees Potential £ Decline

Rising bond yields, particularly rising bond yields relative to the yields in other countries, exert upward pressure on exchange rates.

Mega-investment institutions will transfer money from one country into the next in order to profit on higher returns, the resulting demand for currency to fund these investments will in turn drive up the value of the currency of the high-yield country.

Bond yield matters and that is why currency markets are so obsessed with central banks who are tasked with setting interest rates and therefore determining yields.

Central bank decision making is in turn based upon the underlying strength of the economy.

Improving UK economic growth over recent years has lead to a clamour of predictions that interest rates will be lifted in the UK, starting by 2015 / 2016.

The prospect of higher UK interest rates have exerted upward pressure on the pound to dollar currency conversion which has improved from 1.46 in March to the 1.57 levels we are seeing today.

The question is whether a further improvement can shape up?

Lloyds Bank have released their June International Financial Outlook note to clients which contains their latest forecasts for both UK interest and exchange rates.

“Significant market volatility has led us to reassess our central view for key bond yield forecasts. Based on macroeconomic and policy rate assumptions, we look for the US 10-year yield to rise to 2.7% by the end of the year and the UK equivalent to increase by a similar magnitude to 2.5%,“ say Lloyds.

So - UK bond yields are rising, but the gains are being nullified and even surpassed by the United States.

This differential has prompted Lloyds to become less confident of their previous pound to dollar exchange rate forecasts which have now been lowered.

Commenting on the move the UK bank says:

“While we believe there remains greater scope for an upward adjustment in rate expectations in the UK than in the US, the recent rise in GBP/USD looks overdone – particularly as the Fed is likely to raise rates first.

“We target a move in GBP/USD back below 1.55 over the coming weeks. Further out, the prospect of greater front-loaded fiscal austerity and EU referendum uncertainty next year have led us to revise our end 2016 forecast from 1.57 to 1.50.”

We are presently seeing the pound / dollar spot rate trading at around 1.57 suggesting to us that the currency pair is now overpriced.

If we are to take the word of analysts at Lloyds Bank then those with currency transfer requirements should look at securing current rates. A fall from 1.57 to 1.55 puts £1000 on every £100,000 payment at risk.

A fall to 1.50 puts about £5000 at risk from current levels.

There could of course be the opportunity for further gains to be delivered by the GBP-USD which retains a positive trend profile as we head towards the month end.

A test of 1.62 could yet be achieved but be aware that the 1.60 barrier could prove problematic as this level has proven to offer support and resistance on an historical basis.

Those with large payment requirements should look at utilising market orders - provided via a FCA-regulated currency specialist - to execute payments when their desired rate is hit while protecting themselves with a stop-loss should the market turn towards the levels forecast by Lloyds.

Such an order could see 1.62 automatically executed if it is reached while if the market does reverse another order at 1.56 could be triggered.