– Written by
Frank Davies
STORY LINK Pound Sterling to Dollar Forecast: GBP Holds Near 1.35 After Resilient UK GDP
The Pound to Dollar exchange rate (GBP/USD) held close to 1.3500 after stronger-than-expected UK monthly GDP data offered Sterling fresh support.
June growth comfortably beat forecasts, reinforcing evidence of economic resilience, although the Dollar remained steady after benign US inflation figures reduced expectations of a September Federal Reserve rate hike.
GBP/USD Forecasts: Near $1.35
The Pound to Dollar (GBP/USD) exchange rate held close to the 1.3500 area on Thursday after stronger-than-expected monthly UK growth data provided Sterling with some support.
GBP/USD had advanced to four-week highs above 1.3540 following Wednesday’s US inflation figures before giving back part of the advance.
The pair was trading around 1.3490 during Thursday’s European session.
The US consumer prices data broadly matched expectations and encouraged markets to reduce the probability of another Federal Reserve interest-rate increase in September.
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US headline consumer prices increased 0.1% in July, with the annual inflation rate edging lower to 3.4% from 3.5%.
Core prices increased 0.2% on the month, while the annual core rate declined to 2.5% from 2.6%.
Markets subsequently reduced the probability of a September Fed rate increase to around 40%, compared with 54% a week earlier.
According to Scotiabank; “The pound is showing fractional gains vs. the USD and outperforming all of the G10 currencies in mixed trade. The GBP appears well supported and looks to be threatening a break of Monday’s local high, with gains that continue to mirror the recovery in sentiment.”
UoB commented; “Despite the quiet price action, the underlying tone appears to be firm, and there is a chance for GBP to edge higher.”
Scotiabank added; “The next upside target is the mid-July high in the mid-1.35s and we also note the May 1 peak in the mid-1.36s.”
The latest UK GDP figures offered some reassurance over the domestic economic outlook.
The economy expanded by 0.4% during the second quarter, matching consensus forecasts and slowing from growth of 0.6% during the first three months of the year.
The monthly figures were more encouraging, with GDP increasing by 0.3% in June compared with expectations for no growth.
May’s estimate was revised to show no growth rather than the previously reported 0.1% increase.
Services output increased by 0.4% during June, while production fell 0.2% and construction declined 0.1%.
The stronger June performance reduced concerns over an abrupt slowdown in the UK economy and helped Sterling maintain a firm tone.
The overall market reaction was limited, however, with the quarterly result already fully anticipated and investors still expecting the Bank of England to proceed cautiously on interest rates.
The benign US inflation figures have reinforced expectations that the Federal Reserve will leave rates unchanged in September.
ING had commented ahead of the release; “A soft number should drag market pricing of a September Fed rate hike away from a 50% probability in favour of no change. And a bullish steepening of the yield curve should see the dollar soften – particularly against the procyclical currencies.”
The data subsequently pushed the implied probability of a September increase down to around 40%.
Commerzbank FX analyst Antje Praefcke also expects the Fed to remain on hold next month; “The possibility of an interest rate hike as early as September is likely off the table, as the FOMC will probably want to wait for more data showing that inflation is trending downward before ultimately deciding against a hike altogether.”
The Dollar has nevertheless proved relatively resilient, with inflation still running above the Fed’s 2% target and geopolitical and energy-market uncertainty continuing to provide some defensive support.
For GBP/USD, the mid-1.35s remain the immediate resistance area.
A sustained break above 1.3550 would strengthen the case for a move towards the mid-1.36s, while failure to regain Wednesday’s highs could leave the pair vulnerable to another test of 1.3450.
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TAGS: Pound Dollar Forecasts
