The GBPUSD exchange rate has traded in a four-point range around 1.55 since May and and there is little reason to believe this to change before the end of 2015.
Of course this range-bound trade offers opportunity for traders looking to play the range and will be a boon to exporters / importers looking for FX stability.
Given the uncertainty over the prospects for monetary policy on both sides of the Atlantic, the inability of GBP/USD to make a decisive break in either direction is perhaps not surprising.
External pressures, particularly from slowing growth in China, have added to global deflationary and financial market volatility.
“Even if, as we expect, the US raises rates in December, slightly ahead of the UK, the pound should still find some support into early 2016,” say Lloyds in the latest edition of their International Financial Outlook.
This is because an early rate rise in the UK would come as a bigger shock to the market, which is not expecting the first UK policy tightening until early 2017.
Lloyds Bank are however forecasting a move below 1.50 in the GBP to USD exchange rate conversion by the end of 2016.
“While the pound should receive a lift from a prospective rise in UK short-dated bond yields, there are formidable obstacles to the pound’s sustained outperformance,” warn Lloyds.
Potential EU referendum risk, a still large current account deficit and more acute fiscal austerity should push sterling lower in H2 2016.
Lloyds target 1.45 by end 2016.
Standard Chartered: Markets Mis-Pricing UK Rate Rise, Upside Potential in GBP
As already mentioned, markets are pricing in the first interest rate hike in 2017, way off what analysts are expecting.
Herein lies the opportunity - if the gap between analysts and markets close then the upside pressures on the pound to dollar exchange rate will likely grow.
Standard Chartered have told clients that they remain Neutral on the GBP versus the USD, but expect it to outperform G10 and Asia ex-Japan currencies.
“UK economic data continues to improve, particularly with respect to consumption, wage growth and core inflation, while foreign inflows remains supportive,” says a forecast note from Standard Chartered, “Against this backdrop, we believe the BoE is likely to hike interest rates early next year, ahead of what markets currently expect.”
Analysts believe any gains against the USD are likely to be limited (largely in line with consensus, which is looking for GBP-USD to be largely flat over the next 12 months).
However, “we do expect the GBP to outperform G10 and Asia ex-Japan currencies, where the case for further policy easing amid weak fundamentals continues to exist,” say Standard Chartered.