Pound to Dollar Rate Forecast: 1.5661 is Resistance

The British pound has advanced against its US counterpart – but are these gains the start of a new trend higher?

With a spot rate quoted at 1.5655 at the time of writing it is worth noting we are approaching the upper end of the range.

Can the GBP/USD deliver further notable gains from here? In short, we don’t think so.

“Sterling outperformance though largely stemmed from euro strength against the dollar. Underlying sentiment for the pound suffered in data this week that showed the slowest wage growth in three months which augured a later rather than sooner rate hike by the U.K. central bank,” notes Joe Manimbo at Western Union.

Indeed, Manimbo forecasts the pound sterling to struggle in the week ahead with U.K. inflation data on Aug. 18 expected to hold at zero, far short of the Bank of England’s 2 percent goal.

The Western Union analyst makes an important point – much of the upside in the pound to dollar exchange rate has been a function of US weakness rather than pound strength.

It is for that reason alone we can’t get too excited on sterling’s prospects in the short-term.

There is also the technical nature of the pound’s relationship with the dollar to consider.

GBP/USD remains fixated within a tight sideways-orientated range defined by 1.54 to the bottom and 1.57 at the top.

With a spot rate quoted at 1.5655 at the time of writing it is worth noting we are approaching the upper end of the range.

If history is to repeat the British pound will most likely fail between here and anywhere immediately north of 1.57.

Look for a sustained break of 1.57 to encourage enough buying interest to restart an upward trend.

The U.S. dollar slumped towards one-month lows, on track for its worst week in months.

“The dollar struggled this week after China’s surprise currency weakening raised concerns about global growth which markets saw as potentially throwing a wrench in Federal Reserve plans to raise interest rates,” says Western Union’s Manimbo.

Oil’s fall to six-year lows around $42 was also seen as complicating the outlook for Fed policy as it strengthens headwinds on already low inflation, another factor that contributed to the dollar’s broad underperformance.

“Although the case for the Fed to raise rates this year has wavered, markets still see an elevated chance that bankers could move at their coming meeting in September, a view that should help limit falls in the dollar,” says Manimbo.

The two cents the dollar was on track to lose against the euro had it on pace for its worst week in three months. Reports on U.S. manufacturing and the consumer are due out shortly.

Meanwhile, the EURUSD is pushing higher on diminishing odds of a US September rate hike. In addition, the Greek bail-out provides some buying pressure to the pair.

"We anticipate that this will only be temporary as new US rate expectations will come back. On the short-term, resistance at 1.1278 is at stake," says a note from Swissquote Bank.

The eurozone economy grew slightly less than expected in the second quarter but nevertheless showed encouraging resilience against the backdrop of the Greek debt crisis report Markit, the economic surveyors.

The ECB will not be overly worried by the pace of economic growth coming in slightly below expectations, and will probably view the performance of the economy over the first half of the year as moderately encouraging given the headwind of the Greek crisis. If allowances are made for volatile GDP data so far this year in countries such as France and the Netherlands.

Strategy Ahead of the New Week

Goldman Sachs say support is now at 1.5535 with 1.5661 as resistance.

Sean Lee, a professional trader at Forextell, sets out his plan for the week ahead:

GBP/USD: "Medium term is sideways quiet. Still maintaining the sideways range for now. Nothing major to note fundamentally with the prospects of a rate hike underpinning demand."

EUR/GBP: "Reversal – medium term is sideways normal. Bearish reversal pattern off the top of the range presents selling opportunity in this market type."

EUR/USD: "Reversal – medium term is sideways normal. Short off the top of the range after a reversal pattern formed on Friday. The divergent paths of the central banks should see this pair lower."