British Pound / US Dollar Monthly Technical Forecast
Weekly Chart
Prepared by Jamie Saettele
While a triangle may still be unfolding from the 2009 low in the GBPUSD, it makes sense to consider a more bullish alternative given the break higher in the EURUSD. Under the proposed, the GBPUSD is working higher in a C wave that will eventually exceed 17042. Objectives are the bottom of congestion from 2008 at 17442 (intersects with channel line at end of June) and 17771 (100% extension). Near term, the 2010 high at 16457 should provoke a reaction. 16250 and 16175 are supports. The bullish outlook is valid as long as price is above 15935.
British Pound / US Dollar Valuation Forecast
GBPUSD Valuation Forecast: Bearish
The disparity between British Pound spot and its PPP-implied exchange rate widened in March as rate hike expectations for the coming year continued to build. Much will be determined by the first-quarter GDP reading set to print on April 27 after the disappointing Q4 outcome, leading economic data has mostly surprised to the upside since mid-February so tightening speculation is likely to keep the currency well-supported and help widen the valuation gap at least over the coming weeks. Another flare-up of sovereign risk in the Euro Zone would also encourage sterling higher as capital seeks an alternative regional medium of exchange to the single currency. On balance, while current positioning is de-facto bearish, sellers would be prudent to wait for a more attractive opportunity to enter short.
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.
