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British Pound - US Dollar Technical and Fundamental Forecast for June

British Pound - US Dollar Technical and Fundamental Forecast for June

2011-06-07 19:08:00
David Rodriguez, Ilya Spivak, Jamie Saettele, CMT,
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British Pound / US Dollar Technical Forecast

Weekly Chart

060711_US_Dollar_British_Pound_Technical_and_Fundamental_Forecast_for_June_body_gbpusd.png, British Pound - US Dollar Technical and Fundamental Forecast for June

Prepared by Jamie Saettele

The GBPUSD has held a support line that extends off of the 2010 lows therefore continue to respect upside potential. Trading above the 2009 high of 17042 would satisfy minimum expectations for wave C of a flat from the 2009 low. Focus would then shift to the 100% extension at 17771 and the parallel channel line above 18000. With that said, it is possible that the rally from the 2010 low is complete as wave C of a triangle (forming from 2009 low). A decline below 16057 would trigger this count as favored.

British Pound / US Dollar Interest Rate Forecast

Currency, Central Bank

British Pound,Bank of England

US Dollar, US Federal Reserve

Net GBPUSD Spread

Signal

1-Year Expectations(Basis Points)

31

18

13

Bullish

Yield in 1 Year(Percent)

0.81

0.43

0.38

Bullish

060711_US_Dollar_British_Pound_Technical_and_Fundamental_Forecast_for_June_body_Picture_4.png, British Pound - US Dollar Technical and Fundamental Forecast for June

Bank of England and US Federal Reserve interest rate expectations have hit significant lows, having little net effect on the British Pound/US Dollar currency pair. The British Pound had previously benefited from speculation that the Bank of England would move to raise rates as inflation remained well-above target. Yet a hawkish minority within the BoE’s policy-setting Monetary Policy Committee failed to gain traction, and the majority of central bank officials favor keeping rates unchanged through the foreseeable future.

Vocal policy hawk Andrew Sentance has now stepped down from his post and has been replaced by a more moderate Ben Broadbent. The small but potentially significant shift further reduces the likelihood of Bank of England interest rate hikes through the foreseeable future. Given feeble rate forecasts for both the BoE and US Federal Reserve, we suspect yields will have little important effect on short-term GBPUSD price action.

British Pound / US Dollar Valuation Forecast

GBPUSD Valuation Forecast: Bearish

060711_US_Dollar_British_Pound_Technical_and_Fundamental_Forecast_for_June_body_06072011_GBP.png, British Pound - US Dollar Technical and Fundamental Forecast for June

The Pound is the least overvalued major currency against the US Dollar, trading at 12.9 percent above its PPP-implied fair exchange rate. The UK government’s austerity program has encouraged the Bank of England to keep interest rates at post-2008 crisis lows despite a run-up in headline inflation, and policymakers seem determined to remain on the sidelines. The loss of Andrew Sentence, heretofore the central bank’s most ardent hawk rate-setting MPC committee, reinforces the likelihood of policy standstill over the months ahead. This makes any correction lower a USD-driven affair, with much to be decided by the degree to which US yields recover after the expiry of QE2. Upward pressure on borrowing costs from the need to finance the gaping US budget deficit will be counterbalanced by increasing weakness in US economic data, with the winning side of this tug-of-war as yet unclear. The breakout of renewed sovereign stress in the Euro Zone also remains an ever-present possibility, an outcome that promises to underpin Sterling as a regional alternative if confidence is shaken in the single currency. On balance, while overall positioning is bearish, it seems premature to enter short for the time being.

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.

Written by Jamie Saettele, CMT, Sr. Technical Strategist; David Rodriguez, Quantitative Strategist; and Ilya Spivak, Currency Strategist for DailyFX.com

We always want to hear your feedback on DailyFX articles. Want more content like this? Less? What do you want to see? Send e-mails to drodriguez@dailyfx.com, ispivak@dailyfx.comand jsaettele@dailyfx.com

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