Pound / Dollar Exchange Rate: Could Fed Disappointment Break the Deadlock?

The British pound is caught at familiar levels against the US dollar for the 6th week in a row now - welcome news for those seeking stability in a volatile currency market place.

We continue to see the first rate hike coming in September, but highlight the risk that the criteria needed to raise rates could shift - Barclays. 

While the log-jam in the pound to dollar exchange rate conversion continues people will be asking, as always, where the next move will likely take the pair.

Our near-term call is for more of the same - the GBP/USD is locked in a level above 1.54 and below 1.57.

We have long argued that 1.56 is the pivot point from which there is little appetite by foreign exchange markets to push the pair.

Until we receive a fundamental game-changer in the global economic outlook - or a move by either the Bank of England or US Fed - we are likely to see more of the same.

Indeed, the latest institutional studies on the pound to dollar have focussed on the inability of the pair to retest its best levels of 2015 once more.

However, this situation cannot last indefinitely and Lucy Lillicrap at foreign exchange brokerage AFEX strikes a decidedly bearish tone on sterling / dollar noting technicals have eroded somewhat with repeated failures ahead of 1.5700 resistance .

“While an upside breach here can still improve the interim outlook again (prompting an extension towards 1.6000 if/when seen) focus otherwise looks to be switching back toward local supports. Some support is visible at 1.5400 but once this gives way effective demand should prove limited until 1.5250 then 1.5100 areas again,” says Lillicrap.

It is believed that positive GBP cross rate developments continue to buffer the market here but as USD bullishness is also still a factor GBP/USD prices may well endure another broad sell off in coming months before stability returns.

“On this basis the 2015 lows (at 1.4565) are not yet deemed completely out of reach,” says Lillicrap.

From a fundamental perspective the negative GBP/USD stance is promoted by Danske Bank who have recently told clients they are looking for the exchange rate to fall to 1.51 in coming months.

“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,” say Danske Bank.

Dollar Remains Underpinned

Last week the Fed signalled that it will be appropriate to raise the target range for the fed funds rate once some further improvement in the labour market is evident.

While there is one more jobs report before the FOMC meeting 16-17 September, the markets are guessing that last week’s numbers, with backward revisions, are consistent with "some improvement".

While data overall has been a mixed bag over the last month or so, the surge in ISM non-manufacturing survey is certainly a factor to consider.

“Our ISM model now suggests 4 percent real GDP growth at an annual rate in the second half of the year. The probability of a hike in September moved to 54 percent from 48 percent right before the release and it is our forecast too that the Fed will move in September,” says Lauri Hälikkä at SEB.

The promise of higher interest rates in the United States will continue to underpin the USD’s outlook from here.

This should stand the currency in good stead against the majority of G10. The only exception is the British pound which is of course likely subject to interest rate rises in coming months.

Should the UK turn a more aggressive approach to raising rates then we would expect GBP/USD to attract real interest.

Could US Fed Sink the Dollar?

The outlook for the US dollar rests with the September decision at the FOMC - will the US finally raise interest rates.

The prospect of higher rates has been central to the USD growth story.

However, Barclays tell us in a new note concerning the currency that the Federal Reserve seems to be working to keep markets from becoming too certain over the possibility of a September rate hike.

“Over the past two weeks, whenever the market-implied probability of a September rate hike has risen, a Board member has come forward in an effort to tamp down market expectations,” say Barclays in a note to clients.

Vice Chairman Stanley Fischer gave an interview on Bloomberg television.

He attenuated a  markets with a high level of concern over inflation and then said the Fed should not move before inflation, as well as employment, returns to more normal levels.

“We read the Vice Chairman’s comments as an attempt to retain optionality over policy. We continue to see the first rate hike coming in September, but highlight the risk that the criteria needed to raise rates could shift, as they did in March,” say Barclays.