The GBP to USD conversion should remain above 1.30 for the remainder of 2016 say Credit Suisse however analysts at the Swiss bank warn of an inevitable decline to 1.20 over the next 12 months.
Sterling continues to defend the $1.30 support line with dogged determination, partly aided by improved sentiment in global financial markets. As we have noted here, the UK currency remains a play on global risk sentiment at present.
The move in GBP/USD above 1.30 is consistent with the forecasts put forward by Credit Suisse who have told clients they have upgraded their profile for the Pound to Dollar exchange rate.
Data from the UK economy since the June Brexit vote has been more resillient than many analysts had anticipated, but more interestingly perhaps, Credit Suisse having warned of a more subdued profile for the Dollar over coming months than previously anticipated.
The bank now forecast Sterling to buy $1.34 in three months time, this is an upgrade on the previous target for the pair to reach $1.28 by the turn of the year.
US Dollar and Fed Expectations - Have Markets Got it Wrong?
The reasoning for the upgrade includes a market that has got it all wrong on assuming the Dollar will rise strongly on a US Federal Reserve interest rate rise.
"Market believes the USD will rally as the US Fed resumes rate hikes while other G10 holds rates or eases further," say strategists in a recent client brief.
Credit Suisse argue however that only modest gains are likely vs EUR, GBP, AUD and CAD as this view is widely owned and the Fed is sensitive to USD strength.
“We expect JPY to outperform the USD (a view held since Feb 2016) and believe ‘Trumpxit’ risk is also underpriced. CAD and MXN vulnerable while USD could weaken vs defensive G10 currencies (even GBP),” say strategists at the Swiss bank.
It is also worth noting that economists at the bank expect the Fed to stay on hold until May 2017, this as markets currently place a +- 63% chance of a December interest rate cut taking place.
Pound to Fall Against US Dollar Longer-Term
However, looking further ahead GBP weakness is expected to resume with Credit Suisse expecting the pair to trade at 1.22 in 12 months time.
The Pound appears to be in the driving seat when it comes to GBP/USD's decisive move towards 1.20.
The reasoning for the extended downside includes:
“Longer term we remain concerned about the stickiness of the current account and the impact of Brexit on investment, growth and employment.
“The BoE’s toolkit still looks rather limited for a ‘hard-Brexit’ scenario. A weaker pound may increasingly play the role in helping the economy.”
US Dollar Near-Term Outlook: Watch Out for Fed Speakers
Looking ahead, we have a crowded line-up of Federal Reserve governors who are all expected to give some hint about future interest rate policy at the Fed.
We have Yellen, Bullard, Evands, Mester and George all speaking in sequence.