GBP to USD Conversion Surges on Feb 1st - But Where Next?

We ask a number of leading analysts where they see the British pound to dollar exchange rate moving over coming days.

Sterling was February 1's best performing currency.

Stronger than expected manufacturing activity and an uptick in mortgage approvals set the tone for trading in the London session.

However GBP/USD didn't gain traction until the North American session; the US dollar was sold owing to news that the ISM manufacturing index nudged up to 48.2 in January (previous: 48.0), posting a softer rise than the consensus (48.4) had expected.

"This morning’s report is consistent with our outlook for tepid activity and employment growth in the US manufacturing sector this year. The continued appreciation of the trade-weighted dollar is hurting US manufacturers’ competitiveness in many foreign markets, where demand continues to deteriorate. We expect this trend to continue in the near term," says Jesse Hurwitz at Barclays.

"These reports only serve to solidify our view that the Fed will forgo raising interest rates in March, for the time being the focus is on easier monetary policies and weakness abroad," says Kathy Lien at BK Asset Management.

Can the British Pound Recover?

The pound to dollar exchange rate has fallen back sharply from its best levels of the past 365 days which were recorded at 1.5929 back in June.

Those looking for a stronger GBP to USD exchange rate have therefore suffered a decline in excess of 10% with 3.59% of those decline coming in the last 30 days.

Make no mistake - much of the decline rests with GBP weakness as opposed to USD strength:

“The US dollar has been fairly trend-less over recent weeks and that is fairly reflected in the fact that it ended the month with a gain of just under 1% - all of which came on Friday in the wake of the BoJ announcement,” says Bill McNamara at Charles Stanley in London.

McNamara is surprised that the US currency didn’t perform better in the aftermath of the latest FOMC meeting, given that the tone of the accompanying statement was nowhere near as hawkish as economists had been anticipating.

Studies suggest that the US dollar exchange rate complex is likely to further range-trade in the near-term.

This should allow the British pound the chance to advance should domestic issues improve. Indeed, the biggest test of sterling’s strength over coming days will be the Bank of England’s quarterly Inflation Report, due on Thursday.

Levels on GBP to USD That Must be Watched

According to Axel Rudolph at Commerzbank 1.4151 is key:

“This level will need to be watched closely since a slip through it would put the January low at 1.4083 back in the frame. Below it lies the minor psychological 1.4000 region.”

The 1.3502 January 2009 low remains Rudolph’s primary target medium term but first he still expects a minor bounce to be seen.

“Only a reversal higher and close above last week’s high at 1.4411 would put Fibonacci resistance at 1.4492 ahead of the 1.4568 April 2015 low on the map. From there the downtrend could then resume,” says Rudolph.

However, Tanmay Purohit - a technical analyst with Societe Generale - warns that any strength in the GBP to USD conversion should be viewed in the context of a longer-term move lower.

Writing to Soc Gen’s clients on Monday Purohit says:

“After confirming a H&S, GBP/USD breached below the upward channel in force since 2009 (1.46) and looks to extend the down move towards 2009 lows of 1.36. Monthly RSI is cutting below a multiyear trend suggesting continuation in phase of correction. Short term upside, if any, is likely to be confined to 1.46.”

Lloyds Bank’s Robin Wilkin meanwhile suggests that sideways action is the order of the day.

“Our technical studies suggest that further sideways to higher price action may be seen, so focus this morning will be on the manufacturing PMI’s from a GBP perspective while Fed Chair Fischer comments and then the Iowa caucus results may push the USD around,” says Wilkin.

Lloyds reckon key support today lies at 1.4180/50, a break there re-opening the lows.

“A move up through 1.4315/30 should re-open a test of 1.4420 resistance, with 1.4525-1.4600 key trend resistance above,” says Wilkin.

But, while under this upper area Lloyds look for renewed weakness towards 1.40 and then 1.35 in the weeks ahead.

Emmanuel Ng at OCBC in Singapore agrees that many in the market will be looking for the longer-term move lower to ultimately resume.

“Expect the market to continue to fade upticks in the pair ahead of the BOE MPC and Inflation Report this week,” says Ng.  

Data from the CFTC shows speculators have accumulated further net leveraged GBP shorts in the latest week and “a bearish GBP remains one of our hig her conviction calls,” says Ng.