Pound to Dollar Exchange Rate Desperately Defends 1.50 Support

currency forecast for GBP USD

The GBP/USD is desperately trying to remain above the 1.50 support level as the UK currency gets caught in the heat of the Euro sell-off.

The euro exchange rate complex has come under significant pressure following the decision by the ECB to purchase government debt to shore up the Eurozone economy.

The pound sterling was caught in the cross-fire of the sell-off with dollar demand being the order of the day.

Commenting on the fall in the pound to dollar exchange rate, Joe Manimbo at Western Union says:

"Sterling fell in sympathy with the euro, sinking below the psychologically important $1.50 level for the first time since July 2013.

"The pound had its downside somewhat slowed though by surprisingly positive news on U.K. consumers with retail sales up 0.4 percent in December versus forecasts of a 0.6 percent decline.

"The outlook seems to warrant a sub-1.5000 exchange rate after U.K.

"fundamentals were dealt a setback in dovish central bank minutes and below-forecast growth in wages which taken together reinforced Britain’s low rates for longer outlook."

However, relief for the GBP came on Friday the 23rd of January when UK retail sales beat expectations.

Retail sales volumes rose 0.4 pct on the month in December confounding a Reuters poll forecast for a 0.6 pct fall after a 1.6 percent surge in November.

The GBP shot higher against the euro and managed to break above the 1.50 level against the USD once more.

Technical Outlook for the GBP/USD

We turn to the charts in an attempt to ascertain where the GBP/USD is headed next:

"GBP/USD has broken to the downside out of its horizontal range defined by 1.5035 and the resistance at 1.5274. Further short-term weakness towards the strong support at 1.4814 is favoured. Hourly resistances can be found at 1.5058 (20/01/2015 low) and 1.5213 (22/01/2015 high).

"In the longer term, the technical structure is negative as long as prices remain below the key resistance at 1.5274 (06/01/2015 high, see also the declining trendline). A full retracement of the 2013-2014 rise is expected."

Investec Response to Eurozone QE

The response to the Eurozone's quantitative easing programme continues to roll in.

We hear from Dawn Kendall at Investec Wealth & Investment who tells us:

“Mario Draghi announced the European version of QE and it did not disappoint.

"Rather than provide a mealy mouthed effort, after a year of planning the ECB has delivered a program that should now define the shape of the European project for an extended period of time.

"With Germanic attention to detail, this plan has been engineered to within an inch of its life. Now, all eyes will be on the execution. Unlike the UK, US and Japan, the European Union is not homogeneous.

"In recent weeks, the big question overhanging the market was over risk-sharing and mutualisation. These issues have been addressed clearly and are universally positive.
“The Q&A session after the announcement was illuminating as Draghi was clear that these market operations will be open-ended and not the final solution. So, if we arrive at September 2016 and it has not worked, expect more.

"He accentuated the fact that bonds are fungible due to currency harmonisation and that the system would be mutually supportive.

"He was also explicit in this expectation that banks should begin lending to businesses and consumers. With negative ECB deposit rates, there is a very positive incentive for banks to find other uses for the money.

"Whether European banks and investors will choose to invest in home assets or convert the funding into USD and invest in US real assets is a moot point for the coming weeks and months."

“Immediate market reaction has been positive but it will take a longer period of time to observe exactly how the transmission mechanism of cash from the ECB to banks to consumer will develop. From an economic perspective, future European M3 numbers will give us the clearest indication of the extent of success in putting the cash to work.”