GBP to Dollar Exchange Rate Forecast: Arguable that Uptrend Still Intact

The GBP to USD exchange rate is expected to fall back to 1.40 - and this is where those looking to profit on a recovery should look to buy the British pound argues a leading global investment bank.

GBP vs USD exchange rates week ahead

The pound to dollar exchange rate is seen edging higher on global foreign exchange markets having endured days of losses. 

The GBP/USD pair is at 1.4535, having hit a low of 1.4353 over the course of the previous 24 hours.

The recovery comes on the back of a number of pro-Remain polls being released in recent hours - one by YouGov for The Times and the other by ORB International for The Telegraph.

With the poll-of-polls finely balanced at a 49%-51% split in favour of Leave, the only guarantee is that sterling will remian volatile over coming days.

The pound is not the only currency under pressure; the dollar has some ground to catch up following a notable slump recorded at the end of last week when a shocking Non-Farm Payrolls (NFPs) miss scuppered the dollar's May strength.

The USD gained 3.4% in May but then gave back 1.5% in a few hours on Friday.

The results from the US Bureau of Labor Statistics saw the dollar fall across the board and end the week as the second-worst performing currency in G10. The accolade for bottom spot actually goes to sterling.

It is highly unlikely the Fed will see now as the right time to push for a rate hike in the with employment trending as it is.

It is arguable the short-term trend higher from the 1.38 lows is still intact but it will need a break above the 1.4800 level to reconfirm, with an initial target at 1.4900 if successful.

GBP to USD must break this key level

Alternatively, a break clearly below the trend-line of the short-term up-trend, confirmed by a move below 1.4200 would probably bury the short-term up-trend for good and lead to a continuation down to 1.4100, just above the 1.4093 level of the S2 monthly pivot, a formidable support line which would be expected to provide an obstacle to further downside.

“GBP is likely to become exclusively poll-driven in coming weeks, if it isn’t already,” says Richard Franulovich at Westpac Institutional Bank, “our best guess is that the Brexit/uncertainty premium puts GBP fair value nearer 1.40-1.42 where it’s worth a buy.”

Westpac’s base case is for a commanding “Bremain” win, in similar vein to the UK general election and the Scottish independence votes, where polls proved to badly understate support for the “status quo”.

“Dips into the low 1.40s are to be bought but only closer to June 23,” says Franulovich.

Under Pressure

Sterling has been under pressure since the 26th of May with markets selling GBP on confirmation that the Leave vote is gaining the upper hand ahead of the EU referendum.

The latest fortnightly Observer/Opinium poll shows that those in favour of Leaving the EU now stand at 43%, with 40% saying they will vote to Remain in the Union.

This is a notable swing from the previous poll which revealed Remain four points ahead on 44%, with leave on 40% and 14% undecided.

Meanwhile both YouGov and TNS have released polls on Monday confirming the swing to be true.

Why the swing in a GBP-unfriendly direction? 41% of those in the most recent poll cite immigration as one of their two most important issues when deciding how to vote.

Over recent weeks immigration has shot up the news agenda with a surge of crossings being made from Africa to the European Union.


NFP Decline and Why History Favours the GBP/USD Ending June Higher

In the week ahead investors will want answers to the many questions raised about the future of monetary policy in the wake of the shock fall in payrolls. NFP's registered only a 38k increase in May,

well below the 160k expected. In addition, the previous months 164k result was revised down to 129k.

So poor were the figures that they resulted in a 1.4% fall in the dollar in the wake of the release.

Most of the weakness is due to the lower probability of the Federal Reserve increasing interest rates in either June or even July now.

Before the release it had seemed highly likely they would raise in the summer, with the probability of a June rate hike having risen from 4% to 40% and a July hike at above 60%. Neither of these now seems likely.

The view is shared by NBF Economics, a subsidiary of National Bank of Canada, who analysing the results, showed April and May added together made the worst two-month Non-Farm Payrolls (NFPs) tally for four years – and that is accounting for the 35k striking Verizon workers as well!

“There’s no way of sugar-coating May’s US employment reports because they were awful across the board,” remarked NBF’s Krishen Rangasamy, adding:

“The weak employment numbers will likely prompt a rethink at a Fed that wants to hike interest rates this summer.”

Further, they dismiss the implausible fall in the Unemployment Rate to 4.7% (from 4.9%) as solely due to the dramatic fall in the participation rate.

Research has shown that when Non-Farm Payrolls misses its estimate by over 89k as it did in May, there is a high probability that the dollar will close the month at a lower level than that which it was at just before the release of NFPs.

For GBP/USD this was 1.4432.

It is highly likely the exchange rate will not end June below that level.

The one caveat, of course, is the EU referendum which is a wildcard and should the UK vote to leave Europe you can bet sterling will make a break with tradition and end the month lower.

Week-Ahead Outlook for the Pound

Volatility from changes in poll results are likely to dominate the currency. Recent polls have shown either a slight lead for the ‘Leave’ camp or the two neck-and- neck.

Friday’s Services PMI release showed a higher than expected result in May, but because it was from such a low base it failed to lift sterling, and pointed to a slowdown in growth in the second quarter.

Many respondents in the Services PMI survey highlighted uncertainty over Brexit as a major reason for the slow-down, and this may start to garner support for the Remain campaign as the economic impact of a potential win for leave starts to be hammered home.

As far as data goes, the highlights will probably be Manufacturing Production on Wednesday June 8, however, given the subdued Manufacturing PMI result, which although better-than- forecast, and back into growth territory, was nevertheless still historically low, there is little expectation of a strong result.