GBP/USD Exchange Rate: Why the 1.564 Level Matters to the Outlook
The British pound is expected to add to its recent gains that saw GBP/USD achieve a 7 week high.
"For now at least resistance continues to emerge at 1.5700 but if this gives way studies argue enough compression is apparent to enable an extension towards 1.6000 thereafter as well," - Lucy Lillicrap at AFEX.
The pound sterling soared to a July 1 high against the dollar, demonstrating how a little inflation goes a long way for currencies.
"In a low inflation world, U.K. prices unexpectedly ticked up to 0.1% in July, which was enough to keep Britain poised to raise interest rates in the months ahead,” notes Joe Manimbo at Western Union.
The data has prompted markets to push interest rate yields higher in anticipation of a February interest rate rise at the Bank of England.
The GBP/USD continues to track movements in UK and US yields and interest rate expectations so it will be important to see if we get any pick up following a disappointing Quarterly Inflation Report from the Bank of England.
“It is unlikely to see any major breakouts as traders tread lightly in August so look to take advantage of the range,” says Manimbo.
Indeed, we have been saying for some time now that we see the 1.56 level as the fair-value point to which GBP/USD will gravitate.
Any advances are likely to ultimately be met by selling pressure which would take the rate lower once more.
Easy Forex meanwhile confirm they are bullish on the pound to dollar rate in the immediate term.
In a note to clients the company says momentum is returning to the GBP; "the RSI has just landed on its neutrality area at 50% and is turning up."
Long positions are preferred by Easy Forex saying that above 1.564 targets rest at 1.572 & 1.577 in extension.
Should the pivot give way then falls to 1.5615 and then 1.5575 become viable.
Longer-Term View: Not Out of the Woods Yet
Taking a longer-term view on GBP/USD is Lucy Lillicrap at currency brokers AFEX who believes the interim range seen in GBP/USD at present could easily be used as a base from which to recover from in coming sessions.
“For now at least resistance continues to emerge at 1.5700 but if this gives way studies argue enough compression is apparent to enable an extension towards 1.6000 thereafter as well,” says Lillicrap.
It is argued that at this juncture any such pound sterling advance will still be seen as another component of the ongoing re-consolidation pattern here and thus any such development is not necessarily positive from a longer term perspective.
“However dips are uncovering good support in the 1.5400 region at present and studies argue this must give way before 1.5250 or 1.5100 come back into focus instead,” says Lillicrap.
The US dollar family is under scrutiny at present with the focus swiftly turning to two key events in the US calendar today; all eyes will be on the inflation data and July Fed minutes, with markets looking to extract clear policy signals ahead of the September FOMC meeting.
“Given the central bank’s data-dependent approach, the former will carry greater weight; while our economists expect the headline figure to marginally increase to 0.2% YoY, an incremental uptick in core inflation to 1.9% YoY could well send a potent signal to markets in this global disinflationary environment,” says a note from ING in Holland.
Indeed, an equivalent positive surprise to core prices in May triggered a brief round of broad USD strength, with EUR/USD posting a 1.1% decline as short-term US rates moved higher.
"We think a robust core inflation print and a fairly hawkish tone to the FOMC minutes will be USD supportive given the absence of other market drivers. DXY to move above 97,” say ING.
