Last Updated: 02 April 2014
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We see the euro is also under pressure against the USD suggesting the currency is under broad-based pressure. More losses are now likely as technical resistance levels crumble.
"Tomorrow’s BoE meeting is an important risk as there has been building expectations of a shift lower in the 7% unemployment rate threshold.
"GBPUSD short‐term technicals: mixed with spot somewhat range bound and technical studies pointing in different directions. This leaves us cautious on GBP."
"GBPUSD has rallied to 1.6421 but remains in this weeks 100 pip range (1.6320 to 1.6440 top). Since the GBPUSD early 2014 surge higher to 1.6595, we have seen a steady sell orders hit the markets.
"The pullback has been stronger than we had anticipated taking out support at 1.6424 (fibo retracement). However we remain bullish and expect the pullback should be only temporary. With GBPUSD in a clear uptrend channel, series of higher highs and trend and moment indicators marginally bullish we anticipate further upside."
"GBPCAD perked up a little yesterday and the GBP has nudged higher again this morning—reaching new cycle highs.
"We thought the correction/consolidation was unlikely to extend significantly, given the strong, underlying trend momentum evident in this market—note that the daily DMI study has switched back to bullish quickly today after slipping into neutral in the past few sessions—and the push through minor trend resistance (the top of a rising wedge pattern) negates near-term downside risks and puts the GBP on track to test the 1.80 area. We are bullish here."
Luc Luyet at MIG Bank gives his forecast:
"GBP/USD is bouncing close to its rising channel. A break of the resistance at 1.6474 is needed to negate the recent buildup in selling pressures. Another resistance stands at 1.6603. An initial support can be found at 1.6374 (07/01/2014 low). Another support lies at at 1.6305.
"The break of the major resistance area between 1.6381 and 1.6466 favours a further long-term rise towards the strong resistance at 1.7043 (05/08/2009 high). However, monitor the recent weakness near the resistance at 1.6618 (19/08/2011 high). A break of the support at 1.6220 would negate the positive outlook implied by the recent new highs. Another key resistance lies at 1.6747 (28/04/2011 high)."
The impact of any changes on currencies is however difficult to fathom. Sterling is still performing strongly suggesting markets are little worried, however there are risks to this attitude.
Piet Lammens at KBC Markets says:
The Bank is largely expected to keep its policy unchanged. However, over the previous days, there were some rumours that the BoE could amend its forward guidance, removing/downplaying the importance of the 7% level as reference to raise rates. We are no fan of this scenario, but it is a risk. Whatever, the outcome of the BoE meeting, markets might turn a bit more cautious on sterling in the run-up to the ECB meeting. Cable might underperform sterling ahead of the BoE policy decision. So, the EUR/GBP 0.8252 support should be safe for now.
Richard Way, Editor at The Overseas Guides Company said:
“For anyone planning a move to the USA, Australia, South Africa or Canada this year, today’s exchange rates means their Sterling savings will go much further in their new local currency than six months, a year or 18 months ago.”
He continued: “Against the dollar, the rate of £1/$1.641 puts Sterling at around a two-and-a-half-year high – something that also favours UK investors targeting properties in American hot spots, in particular Florida.”
“Those headed to Australia will be pleased to hear the exchange rate hasn’t been so favourable since September 2009, with £1 currently worth around AUD$1.833, and it’s a similar story for the Canadian dollar. Anyone needing to move money to South Africa is even more fortunate, with Sterling hovering around a five-year high against the rand.”
Berenberg Bank's Chief UK Economist Rob Wood says he sees the 7% unemployment threshold being hit mid-2014. How will the BoE react?
Wood says:
"The BoE could respond to faster-than-expected unemployment falls by lowering their unemployment threshold to 6.5%. But that would make a mockery of a policy meant to provide clarity about interest rates. If the threshold can be lowered once, it can be lowered again, or raised for that matter.
"We expect the first hike in Q1 2015. Once the threshold is breached, the BoE can return to targeting inflation. And there is little inflationary threat right now, giving the BoE room to wait before hiking. The February Inflation Report is a likely time for further explanation."
The bottom line though is that that interest rates will likely rise sooner than the BoE has been arguing.
"With the MACD firmly below its zero line, there’s potential for extension of the bearish trend. Support is at 0.8253, a break below which would expose 0.8160 (GBP/EUR @ 1.2255). Resistance is at 0.8346," says Geoffrey Yu at UBS.
Also favouring further downside is ICN Financial who tell us: "EURGBP resumed the bearish bias after testing area around 0.8320 yesterday, where we look for further downside towards the major swing low around 0.8250 (GBP/EUR @ 1.212). Overall, the bearish scenario continues to be favoured."
"With the MACD firmly below its zero line, there’s potential for extension of the bearish trend. Support is at 0.8253, a break below which would expose 0.8160. Resistance is at 0.8346."
Yu warns that the recovery in the Eurozone poses both opportunities and dangers for the UK and GBP.
GBP has benefited from a strong inward investment as of late, indeed the UK currently enjoys the status as the top global recipient of FDI (per UNCTAD data).
But, will an improving Eurozone steal some of that inward investment? What about a capital outflow as investors no longer require the UK's safe-haven?
"We still look for sterling gains on the crosses in 2014, but the currency should not rest on its laurels as competition for capital flows could start to heat up," says Yu.
"Range-trading is likely to persist again today, with investors probably waiting for the ECB and BoE meetings and US labor data on Friday before talking clearer positions. Still, the daily agenda is likely to be EUR supportive while weighing on the USD vs. the other majors. "
The Euro is also on the back-foot while broad-based USD strength continues to be felt.
Many in FX land are tuned into the idea that a rate cut could in fact happen this year.
"There is growing speculation that the BOE could depart from tradition and release a statement at a meeting where no change to rates is made. The BOE could try to talk down rising rates and the pound by limiting speculation that it is moving closer to raising rates this year," says Omer Esiner at Commonwealth FX.
Halifax House Prices (MoM) (Dec): Actual = -0.6%, forecasted = +0.7%. November showed a rise of +1.1%.
Halifax House Prices (3m/YoY) (Dec): Actual = +7.5%, expected = 8.3%, November's quarterly figure came in at +7.7%.
Ahead we have the Bank of England Credit Conditions Survey for the 4th quarter due at 09:30.
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