The sterling dollar exchange rate had been steadily rising in the second quarter and this continued in July. Despite the benign inflation picture the Pound has reacted positively to a slew of better than expected economic data releases. Growth in the UK was reported at 0.7% in the second quarter in a sign that the economy is well on target for robust sustainable growth for the rest of the year. The services sector which accounts for the vast majority of GDP was particularly robust and is clearly driving output. Manufacturing was not quite as firm in a sign that perhaps the economy is not rebalancing in the manner that the government would like however the economy is moving in the right direction particular as households will have more money to spend due to low energy prices and inflation at near zero.
Mark Carney , Governor of the Bank of England , also helped to support the Pound as he hinted that interest rates could rise as early as the turn of the year. He stated that " the decision as to when to start the process of adjustment will probably come into sharper relief around the turn of this year". He noted that any change would be dependent on the data remaining positive and could also hinge on external factors such as the exchange rate. The BOE remained unanimous on policy in their July meeting but it is clear from the rhetoric that a number of members of the committee are beginning to challenge the status quo. The BOE did state that the Greek situation was a significant factor in their decision making process and the fact that the situation in Athens is close to being resolved , for now , may mean that we are edging much closer to a move away from the current emergency levels. Next month's meeting will be very closely watched indeed.
The federal reserve seem to remaining fairly cautious over the timing of any interest rate rises. Officials were dovish at their most recent meeting believing that the conditions for policy firming had not yet been reached. In particular they will be watching the jobless rate and that inflation was moving back towards the committees objective. This helped drive the dollar lower as analysts pushed back expectations of an early rate rise. Despite a robust reading of second quarter GDP, which rose at an annualised pace of 2.3% , workers pay rose by only 0.2% last month dashing projections that an improving labour market would boost pay. This was a further setback to officials counting on higher spending to increase inflation. For now the dollar remains on the back foot versus Sterling as traders ponder whether the BOE may raise rates before the Federal Reserve.
For USD Buyers
Sterling is on an upward trend and has been since mid April. The lower level of the uptrend is just below 1.5550. 1.5500 has also provided some chart support over the last couple of weeks . If you have short term requirements I would suggest leaving protection just below 1.5500 and aiming for a retest of the 2012 highs of 1.5900. Those with longer term horizons and deeper pockets should aim for 1.6000+ leaving any stop losses below the important 50% Fibonacci level 1.5248.
For USD Sellers
You really may have missed the boat as the momentum indicators would suggest that the rally is not yet over. I would certainly suggest 1.5500 as a level to sell dollar if we see it again as there is now a strong risk that we test the 1.5900 2012 high in Q3.