British Pound US Dollar Exchange Rate Forecast

 

The overall structure remains intensely bearish and at this point we cannot rule out the possibility of a full retracement back to the 2009/multi-year lows by 1.3500 over the coming weeks. Price action however remains quite choppy, and the risk for a sharp corrective bounce before heading lower is a distinct possibility. As such, our recommendation would be to look for opportunities to sell into strength rather than selling on downside breaks. 

 

British Pound / US Dollar Interest Rate Forecast

The British Pound/US Dollar currency pair has become similarly disconnected from shifts in US Federal Reserve and Bank of England rate forecasts—moving much more closely to moves in the US S&P 500. Given meager rate hike expectations for both currency pairs, it is perhaps unsurprising to see that the GBPUSD has moved independently of yields. Much like the USDJPY, its 20-day correlation to risk barometers is near its highest levels since the height of the financial crisis in 2008. 

 

We may need to wait for more substantive shifts in BoE or Fed interest rate expectations to truly take an interest rate-based bias on the GBPUSD. As it stands, yields give little insight into the potential trajectory of the recently-volatile pair.

 

British Pound / US Dollar Valuation Forecast

GBPUSD Valuation Forecast: Neutral

The British Pound is trading in line with its PPP-implied exchange rate. The UK general election has come and gone, with little that can be said with certainly about the macroeconomic landscape until the new administration unveils an emergency budget designed to trim the deficit this month. While austerity is sure to be the name of the game, traders are unlikely to show much conviction until the precise mixture of spending cuts and tax increases – as well as their timing – are out in the open to be scrutinized. On balance, the growth rate of government spending has regularly outpaced that of private consumption since the first quarter of 2008, so any significant retrenchment on the fiscal side is likely to bring a slowdown in growth and keep the BOE (as best) committed to the current, loose monetary policy setting all the while the US Fed inches closer to a rate hike. This hints that a drop into undervalued territory may be ahead, but exploiting such an outcome must wait for the time being as the current lack of any real disparity between spot and PPP keeps us on the sidelines.

 

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.