Is It Time to Sell the GBP?

The increase in US interest rates is going to be broadly felt in currencies across the globe. Our question today is if it is time to sell the GBP (British Pound). Pound Sterling Live says there will be a GBP/USD decline to 1.51.

The pound to dollar exchange rate is presently at fair value but will fall in the next few months says an updated currency note from Danske Bank.

Going forward, the central driver for the GBP/USD will be the difference in interest rate yields between the United States and the UK confirm Danske Bank in a just-released note to clients.

As such, projections for the exchange rate will rely on forecasts on interest rates.

The central role played by interest rates in global FX was put firmly in the spotlight on Thursday the 7th when the Bank of England undercut the pound sterling by denying a 2014 interest rate rise was likely.

In the wake of the disappointment the GBP weakened 0.7% versus EUR and 0.85% versus USD.

The exchange rate at the time of this writing is $1.56 to £1. Danske Bank is predicting a three and a half percent fall in the value of the GBP. If you are holding GBP it may be the time to sell and if not it may be the time to trade Forex options and put a call on the GBP with dollars.

What Else Drives the GBP?

It is not just the US interest rate that drives the value of the GBP. In general, a stronger economy results in a stronger currency. The Daily Times of Pakistan says that the British economy is performing well, but there is concern over the deficit.

Britain’s economy has grown strongly over the past three years, and is forecast to continue growing, but concerns remain over the current account deficit. The UK’s current account balance – the difference between money coming in and money going out of the country in payments, goods and services – reached minus 26.5 billion pounds (41.4 billion US dollars) in the first quarter of this year, itself a reduction from a peak of 31.8 billion pounds in the third quarter of 2014. As an annual figure, it was 5.5 percent of UK GDP in 2014.

The economy and current account deficit are both short and long term issues. The concern in the short term is probably still the US interest rate.

US Economy

The US Federal Reserve will raise rates if the US economic recovery stays on track. Reuters reports that the Fed is close to hiking rates as the US economy is close to normal.

Economic conditions in the United States have largely returned to normal and a Federal Reserve decision to raise interest rates should come soon, Atlanta Fed President Dennis Lockhart said on Monday.

“I think the point of ‘liftoff’ is close,” Lockhart said in prepared remarks for an address to the Atlanta Press Club. “The economy has made great gains and is approaching an acceptable normal – conditions are no longer extraordinary.”

Lockhart, regarded as a centrist on the U.S. central bank’s policy-setting committee, did not in his prepared remarks repeat recent comments in which he said he is ready to vote for a rate hike next month.

But he made clear he feels the economy has cleared the major hurdles that he saw earlier in the year.

This having been said, is it time to sell the GBP? In the short term Forex traders will probably be better served holding the USD.