GBP/USD Forecast to Decline to 1.51
- Written by: Gary Howes
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The pound to dollar exchange rate is presently at fair value but will fall in the next few months says an updated currency note from Danske Bank.
Going forward, the central driver for the GBP/USD will be the difference in interest rate yields between the United States and the UK confirm Danske Bank in a just-released note to clients.
As such, projections for the exchange rate will rely on forecasts on interest rates.
The central role played by interest rates in global FX was put firmly in the spotlight on Thursday the 7th when the Bank of England undercut the pound sterling by denying a 2014 interest rate rise was likely.
In the wake of the disappointment the GBP weakened 0.7% versus EUR and 0.85% versus USD.
According to Danske Bank’s short term financial models, pricing action in the FX market seems fair given the decline in UK yields.
“Relative rates are also expected to be an important driver for GBP/USD in H2. Based on our interest rate forecasts, where we expect the Fed to hike in September, the repricing of 2Y US interest rates is expected to much larger relative to the 2Y segment in UK,” says Danske Bank’s Mikael Olai Milhøj.
With regards to the GBP/USD forecast Danske say they expect the rate spread to change sign in the coming months going from 20bp today to -10bp in 6M.
Even if the Fed hikes later this year, the 2Y swap spread should still narrow substantially.
“We target GBP/USD at 1.51 in 6M,” says Milhøj.
Economic Forecast for the Week ahead
TD Securities’ Ned Rumpletin sets us up for sterling's upcoming week:
- June Unemployment (Wed 12 Aug):
"The 3MMA unemployment rate bounced off a post-crisis low in April, ticking up to 5.6% in its May release. We see the rate holding here for the three months to June, as claimant counts have held relatively stable in recent months.
"This places us largely in line with the consensus view, as well as the just-published Inflation Report forecast, which expects the unemployment rate to hold at its current level through September."
- July CPI (Tue 18 Aug):
"Annual CPI growth has been hovering around zero percent since February this year, largely on account of weak commodity prices and GBP strength. We anticipate next week’s print to be in line with recent months, at 0% y/y, as these factors are expected to continue weighing through most of 2015.
"Core inflation, too, has remained relatively soft in recent months, and we expect just a minor up-tick from June’s 0.8% y/y reading to 0.9% y/y in July."
For us the inflation report will be the highlight of the week, it needs to come in ahead of expectations for the British pound to regain some of that lost sentiment.
- July Retail Sales (Thu 20 Aug):
"With low headline inflation and recent wage and productivity growth supporting healthy growth of real household incomes, we expect June’s negative retail sales reading to be just a blip. We expect a small increase coming for July.
"Recent surveys show households are more confident about further income increases, and consumption growth has been gaining momentum over recent quarters, so we don’t see this trend reversing in the near-term."
