GBP/USD 2014 Forecast

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The Sterling rally into the second half of 2013 has been nothing short of remarkable, with the pound gaining over 10% against the big dollar on renewed optimism the British economy has turned a corner.  A number of strategic government programs to help with the recovery in the housing market has succeeded in boosting dwelling prices along with consumer confidence, with strong discretionary spending numbers underpinning the upwardly revised growth forecasts for 2013 and 2014.

The better than expected leading economic indicators have increased speculation the Bank of England will have to assess the prospect of altering its newly minted forward guidance to better align with the incoming data points, paving the way for interest rate increases sooner than previously forecast.  The potential for monetary policy tightening prior to 2016 has increased traders’ bullish bets on the pound, pushing GBPUSD to highs not seen since Q3 2011.

While on the surface it seems as if “up” is the only way to proceed for Cable, there are a number of headwinds that could potentially throw a wrench in the Sterling’s march higher.  Knowing the housing market alone cannot sustain a balanced recovery moving forward, Governor Mark Carney recently announced the axing of its Funding for Lending Scheme that provided incentives for banks to issue mortgages, looking to refocus those resources on helping small businesses regain their footing.

While the proactive approach is a means to mitigate against the potential for a housing bubble, the causality is that one of the main sectors contributing to the better than expected growth in 2013 will not be getting as much financial “juice” as it once was, thus raising concerns we could see a slight slowdown in the months ahead.  In addition, although household consumption was revised higher to 1.9% for 2014 by the Office for Budget Responsibility, most of this is likely to come from consumer savings as wage growth continues to remain well below current levels of inflation.

The real wage squeeze is likely to act as a drag on consumption growth moving forward, at least until some of the excess slack can be removed from the economy and wage growth moves closer in-line with inflation expectations.  The aforementioned point being key to the recent commentary from Carney that the unemployment rate threshold of 7% laid out in the BoE’s forward guidance is not an automatic trigger for higher rates, and that a successful breach of that level will only act as a conduit for discussions around the tightening of monetary policy.

With the risk of rebalancing from a housing-led recovery where consumers gorge themselves on loose monetary policy, to a more balanced trajectory that encompasses business investment and export growth, we feel the impressive charge from the pound may be running out of momentum.  As such, we see a general weakening of Cable as we head into the first half of 2014, as the Federal Reserve begins to unwind their asset purchase program, with a turnaround for the pound only realized into the end of 2014 as attentions are refocused as to whether the Fed or BoE will be first take a stab at higher interest rates.

While there is the potential for the pound to gain some additional strength against the USD into the end of the year should the FOMC decide to forego a small taper in the growth of their balance sheet this week, the associated bid-tone will likely be met with stiff resistance in the high-1.64s.  The risk to our fundamental position on GBPUSD is that the projected unwind of the monthly asset purchases from the Fed doesn’t materialize in early 2014 as expected, and the upward momentum of the pair confirms the break of the neckline from the double bottom in Q1 and Q3 of this year, with technical buying poised to push the pair through the 2011 highs into the upper-1.60s.  On balance, we feel that the impending taper from the FOMC (whether next week or early 2014) combined with the challenges of navigating from a housing-led recovery to one which encompasses business investment and export growth, will lead to consolidation for GBPUSD heading into 2014, with renewed vigor in Cable only arising in the latter half of 2014.

Cambridge Mercantile: GBPUSD Forecast

Q4 2013 Q1 2014 Q2 2014 Q3 2014
1.6400 1.6050 1.5850 1.6125

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About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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