GBP/USD Conversion Looks to Break Free from 1.56 Region

The GBP/USD exchange rate surely has to break out of the present quagmire - the question is whether it will be higher or lower.

The pair has been stuck around the 1.56 region since mid-July and those with GBP-USD payments will have been doing so in an uncharacteristically stable environment.

This stabilisation confirms traders are unwilling to be on either the pound sterling or US dollar, both of which are tipped to outperform their G10 rivals in coming months.

"With the lower liquidity at this time of year we could see an outsized move driven by the model community immediately after the data release if it is significantly out of line. Otherwise we remain broadly trapped in recent ranges. Our underlying bias is unchanged though, that being the USD and GBP should remain outperformers due to policy divergences," say Lloyds Bank in a foreign exchange briefing.

According to analysts the catalyst for a major move in sterling / dollar could well be the much-anticipated Quarterly Inflation Report due at from the Bank of England on Thursday with further excitement being offered by Friday’s US employment numbers.

Indeed, the non-farm payrolls on Friday are being tipped as the most important in years for the US dollar exchange rate complex.

As we move through the first trading day of the new month sterling / dollar is seen right on the 1.56 level.

High street banks are seen conducting payments around the 1.5151 marker while independent providers are offering around 1.54.

A Recovery Bottom is Formed

Forecaster Yann Quelenn at Swissquote Research believes that regardless of where GBP/USD heads in the near-term, those with a view on the broader picture should note that the bear-trend appears to have ended:

"GBP/USD is still moving in either direction. Hourly resistance is given at 1.5803 (24/06/2015 high). Support is given at the 38.2% Fibonacci retracement at 1.5409. Stronger support is given at 1.5330 (08/07/2015 low). We expect the pair to decrease again within the next few days.

"In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement)."

US Dollar Strength Ahead?

The pound sterling is one currency that is holding its own against an increasingly aggressive US dollar.

Currency markets are looking to press the USD higher ahead of the start of the interest rate raising cycle at the US Fed.

“Short term yields in the US firmed which supported the USD. In our view, the next two labour market reports (7 August and 4 September) should show that nonfarm payrolls continuing to rise comfortably about the 200k mark with unemployment rate trending lower,” says Roy Teo, Senior FX Strategist at ABN Amro.

ABN Amro expect the FOMC to raise its target range for the fed funds rate by 25bps to 0.25-0.5% on 18 September.

“As this is not fully priced in by financial markets, we maintain our view that the USD strength will persist in the coming months,” says Teo.

BMO Capital Favour the Pound Against the Dollar

In light of the quagmire, expect price action in GBPUSD to remain reasonably well contained ahead of Friday’s US Employment Report.

However, a hawkish tone from the BoE on Thursday would likely see the 1.5750 tested, suggests
Greg Andserson at BMO Capital.

That said, BMO Capital do not expect resistance at 1.5810 to be broken ahead of the US employment figures unless the BoE raises its 2Y forecast for CPI above 2.0%.

“Initial support in GBPUSD is at 1.5550; there is a stronger area of support around 1.5340 that appears unlikely to break unless the BoE is dovish AND the US employment report is exceptionally strong,” says Anderson.

Friday’s employment report is the biggest event of the month for the USD.

“It is also probably the most important Employment Report since the end of QE3. Our economists are forecasting a +210k increase in Non-Farm Payrolls and a flat Unemployment Rate at 5.3%,” says Andserson.

BMO also forecasts Average Hourly Earnings rising by 2 tenths, which would push the YoY% to 2.2 or 2.3.

"We remain committed USD bulls and we expect it to post solid gains across the G10 complex in the weeks and months ahead. With the Fed unwilling to signal a clear commitment to a September hike, however, we think it may be a little too early for the USD’s uptrend to resume over the next few sessions," says a note from TD Securities, confirming there is a consensus for USD strength.

With a busy data calendar culminating in the July US employment report this Friday, TD think we will need to see a steady stream of strong economic indicators from that economy to kick of an early start to the next phase of the USD’s rally.

US factory orders rose 1.8% m/m in June, in line with consensus expectations.

Orders for durable goods in June, initially estimated in last week’s report, were unrevised at the headline level at 3.4% m/m.

Nondefense aircraft orders continue to show a 66.1% m/m surge at quarter-end that skewed estimates of aggregate factory demand.

At the core level, capital goods orders were revised down modestly in May (-0.8% m/m, initial: -0.4%) and June (0.7% m/m, initial: 0.9%).

While orders now show less of a rebound in June, the comparable core capital goods shipments series was revised up a bit (0.3% m/m, initial: -0.1%). Elsewhere, manufacturers’ inventories of durable goods were revised higher in June (0.6% m/m, initial: 0.4%), and nondurable inventories are estimated to have expanded 0.4% m/m (previous: 0.5%).