British Pound US Dollar Exchange Rate Forecast

British Pound / US Dollar Monthly Technical Forecast

Monthly Chart

Prepared by Joel Kruger

The market appears to be locked in no-man’s land at current levels with the price in the middle of a very broad 1.3500 to 1.7000 range. However, given the bearish price action in August and underlying downtrend, the risks from here are to the downside, with a lower top being sought out by 1.6000, to be confirmed on a break back below 1.4240. Only back above 1.6000 negates and gives reason for pause.

British Pound / US Dollar Interest Rate Forecast

Sharp downgrades in both UK and US interest rate forecasts have left 12-month rate expectations quite near neutral, giving us few clues on the future of GBPUSD price action. We previously saw the British Pound lose against the US Dollar and other counterparts as interest rate traders pulled back expectations for UK yields. Now that the Bank of England and US Federal Reserve are essentially expected to leave rates unchanged, however, there is little scope for yield-linked moves.

It will nonetheless be important to monitor growth and inflation trends out of both economies. Questions surrounding the future of US Federal Reserve and Bank of England Quantitative Easing programs will likely continue to drive volatility out of USD and GBP pairs. Any substantial downgrades in growth forecasts could push either currency lower for said reason alone.

British Pound / US Dollar Valuation Forecast

GBPUSD Valuation Forecast: Neutral

The British Pound continues to track closely with the PPP-implied “fair” exchange rate with spot a meager 5.3 percent into overvalued territory. Gauging the catalysts for the currency has been a difficult task lately as correlation studies reveal negligible links with priced-in relative monetary policy expectations as well as risk appetite (as tracked by the MSCI World Stock index). On balance, it seems prudent to take to the sidelines for the time being until greater clarity (as well as a more attractive valuation disparity) emerges.

What is Purchasing Power Parity?

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.