British Pound US Dollar Exchange Rate Forecast

[B]British Pound / US Dollar Monthly Technical Forecast[/B]

Although the rally from 1.3500 has stretched more than expected, the decline still counts as a 4th wave that will eventually be fully retraced. 1.6680-1.6830, a former 4th wave price extreme and 50% retracement of the decline from 2.0162, should serve as strong resistance. RSI is above 80 on the daily so beware of a pullback prior to completion of the larger advance.

[B]British Pound / US Dollar Interest Rate Forecast[/B]

The US Federal Reserve and the BoE have used all their bullets in their efforts to stimulate growth and provide liquidity to the markets. The expansion of the MPC’s quantitative easing efforts by £50 billion was a surprise to markets but did little to change interest rate expectations as Credit Suisse overnight swaps slightly increased to 51 from 49. The expectations that both central banks will leave rates on hold over the near-term, has limited the impact of interest rate forecasts. The GBP/USD has risen mainly on risk appetite as the dollar continues to get battered by reversing safe-haven flows.

Sterling has started to see broad based support as the U.K. continues to see improvement in its fundamentals with gains in retail sales, manufacturing and construction activity. Additionally, there are signs that the central bank’s quantitative easing efforts are producing results with mortgage approvals reaching a yearly high and banks becoming less reliant on their funding efforts to meet liquidity needs. As the economy continues to show signs of emerging from the current downturn we may continue to see sterling support.

[B]British Pound / US Dollar Valuation Forecast[/B]

[B]GBPUSD Valuation Forecast: [/B][B]Bearish[/B]

The British Pound has surged sharply higher above its PPP-implied exchange rate on the heels of a rebound in risk appetite that has weighed heavily on the safety-linked US Dollar. The prevailing outlook for economic growth appears to favor the greenback, with a survey of economists conducted by Bloomberg suggesting the US will outperform the UK by an average 1.4% this and next year. While this would argue for a comparatively less aggressive BOE, current yield expectations stand slightly in favor of the sterling. That said, the difference in rate expectations is not profound and could quite easily invert in the weeks ahead. In the meantime, the British unit could widen the current disparity, offering sellers a lucrative opportunity down the road when growth returns to the forefront as the primary catalyst for price action.

[B]What is Purchasing Power Parity?[/B]

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.