GBP/USD Rate Outlook Sees 1.58 as Next Target

The pound to dollar (GBP-USD) exchange rate pair is predicted to maintain a positive bias but will likely struggle at key resistance points that lie ahead.

With interest rate policy being central to currency direction it is no wonder the British pound was the best performing currency during the week ending 17th July.

The momentum afforded by recent gains has merely served to reinforce the positive stance on GBPUSD and the bulls are in charge.

Furthermore, the US dollar has struggled this week with recent losses being driven primarily by the decline in Treasury yields as ten-year rates fell more than 4bp on a day when Eurozone, Australian and U.K. rates increased.

"However in the grand scheme of things the decline in rates is small and should not have triggered such a deep slide in the greenback.  Instead we believe that the dollar's weakness had more to do with the currency being overbought," says analyst Kathy Lien at BK Asset Management.

The pound to dollar exchange rate is seen at 1.5612 in mid-week trade. High-street banks are meanwhile seen quoting in the region of 1.5175 for currency transfers while independents are closer to the market at 1.5425.

Above: Spot returns against the US dollar for week ending 19th July 2015 confirm how positively aligned the pound sterling is compared to its competitors.

The Outlook for the Pound v Dollar Exchange Rate

The week ahead is light in terms of data, but we are watching retail sales, the release of the BofE’s minutes from the July meeting and public finance data.

This is by no means a full calendar and with a similar lack of excitement to come out of the US economy we believe markets will stay focussed on technical considerations.

We see a clear range defined by support at 1.54 and resistance at 1.58 and recent momentum could open the door to a test of 1.58.

Arnaud Masset, a Market Strategist with Swissquote Bank also remains confident that the path of least resistance for the GBP-USD is up:

“Cable is trading range-bound between 1.5670 and 1.5550 as it failed several time at breaking the strong 1.5640/70 support area (Fib 38.2% on June rally).

“GBP/USD just broke several strong resistance, such as the 200dma on July 10, the 38.2% long-term Fibonacci level (on July 2014 - October 2105 debasement) and the 50dma, both on July 14.

“This is therefore a strong bullish signal from the technical side while on the fundamental one, traders are starting to price in a rate hike from the BoE.”

The Bank of England Governor explicitly warned markets last week that an interest rate rise was due in coming months and the British pound popped higher ensuring it was the leading performer in the G10 space.

However, Lucy Lillicrap at brokerage AFEX says for further buying interest to transpire GBP/USD must leap a couple of significant hurdles:

“Despite encountering channel support at 1.5300 over recent days Sterling values are also respecting resistance in the vicinity of 1.5700 and this must be hurdled in order to enable another foray towards 1.5900 – if not nearer 1.6050 thereafter.”

It is noted that such a bullish resolution has not yet been ruled out but any positive reading would probably require prices staying above at least 1.5295/05 key support and localised buying interest around 1.5450 as well.

To the downside 1.41 is seen as a potential minimum.

“When a drop beneath this lower band develops the past few weeks GBP action will begin to look much more obviously top-forming instead. On this basis the psychological 1.5000 level should subsequently give way, targeting 1.4700 next and 1.4400/1.4100 thereafter as USD demand resurfaces,” says Lillicrap.

USD Suffers a Setback

The dollar was on a mixed though mostly firm footing, not far from three-month highs against the euro and its strongest in more than six years versus the loonie.

The dollar seems to be using a lull in America’s data calendar to catch some breath after logging its best week in two months.

The ball is seen in the hands of U.S. housing market this week to drive the dollar.

The main items on the calendar are existing home sales Wednesday and new home sales Friday. Next week is huge with the Fed and Q2 growth.