The recent upward move of British pound (GBP) against US dollar since 12/28/10 from 1.5345 to a high on 2/13/11 at 1.6278m has raised the question whether GBP is able to continue its upward move towards 1.6720 price level. In this article, I seek an answer by taking a techno-fundamental approach. Accordingly, I review both fundamental factors and technical indicators to verify if GBPUSD currency pair can break out 1.6278 to reach at least 1.6720 price level.
Among major factors that influence the exchange rate price level are differentials of interest rate, inflation, and Gross Domestic product between two countries, US and UK. In this article, I analyze each of the afore-mentioned factors and project a probable future upward move for British pound against US dollar.
Fundamental Analysis
Interest Rates Differential – When there is a difference between interest rates between two countries, it’s assumed that investors prefer to invest in the country with higher interest rate to gain better returns. Accordingly, the currency of a country with a higher interest rate tends to appreciate against the currency of a country with a lower interest rate. As depicted in Figure 1, the US Dollar Libor rate has dropped from 0.28469% on May 4, 2010 to 0.26300% on February 1, 2011. Conversely, the British pound Libor rate has increased from 0.55469% to 0.6000% for the respective dates. This is considered a positive factor for Pound Sterling appreciation against US dollar.
Figure 1 – Comparison between US-Libor and GBP-Libor for the past 10 months from May 2010 to February 2011.
Inflation Rates Differential – Another major factor that influences the exchange rate between US dollar and British pound is the differential between these two countries. Investors perceive a better growth and higher interest rate for a country with a high inflation rate relative to another country with lower inflation rate. If the Consumer Price Index is used as a proxy for inflation rate for each country, there is an increase for the UK’s CPI versus the US CPI’s since May 2010 to January 2011. The UK’s CPI annual rate of change moved up from 3.4% to 4.0% while for the US, it moved up from negative 0.10% to 0.4%for the respective dates. As the Figure 2 illustrates, the relative inflation growth for the UK has grown more than US. This in turn translates to a positive factor which contributes to the appreciation of the UK’s currency British pound against the US dollar.
Figure 2 – Comparison between US-CPI and UK-CPI percentage changes since May 2010 to January 2011. Date Sources: US Bureau of Labor Statistics and UK Government Statistics.
Gross Domestic Products Differential – In addition to interest rate and inflation differentials, Gross Domestic Product differential between two countries influences the exchange rate between UK British pound and US dollar. Figure 3 exhibits a comparison between two countries GDPs. There is a clear diversion between US-GDP and UK-GDP. The US-GDP grew from 1.7% in the second quarter to 3.2% in the last quarter of 2010. Conversely, the UK-GDP shrank in the same time period from 0.35 to negative 0.5%. In other words, as the US economy expanded for the second half of 2010, while the UK economy due to austerity measures contacted. This discourages investors to invest in the UK resulting depreciation against the US dollar. However, due to other factors discussed earlier since May 2010 the British pound has appreciated against the US dollar from 1.42295 to 1.62622 in February 18, 2011.
Figure 3 – Comparison between US-GDP and UK-GDP percentage changes since May 2010 to January 2011. Date Sources: US Bureau of Labor Statistics and UK Government Statistics.
Overall, fundamental analysis as stated above lead us to believe that there is a better chance for the British pound to appreciate against the US dollar in the coming months. This is supported by lingering high unemployment rate above 9 percent in the US. The US stock market recovery has been mainly fueled by the US government stimulus programs along with high productivity measures implemented by companies. Due to massive layoff, remaining employees had to work harder and long hours to make up for the ones who were let go. However, as the inflation rate increases employers have to increase the salaries which cut in their profits. Furthermore, housing sector as a major consumers’ asset is still far from recovery with the huge inventory build ups and foreclosed houses still in the banks liquidation pipelines. Consequently, the British pound has a better chance to appreciate against the US dolor in the coming months.
Overall, fundamental analysis as stated above lead us to believe that there is a better chance for the British pound to appreciate against the US dollar in the coming months. This is supported by lingering high unemployment rate above 9 percent in the US. The US stock market recovery has been mainly fueled by the US government stimulus programs along with high productivity measures implemented by companies. Due to massive layoff, remaining employees had to work harder and long hours to make up for the ones who were let go. However, as the inflation rate increases employers have to increase the salaries which cut in their profits. Furthermore, housing sector as a major consumers’ asset is still far from recovery with the huge inventory build ups and foreclosed houses still in the banks liquidation pipelines. Consequently, the British pond has a better chance to appreciate against the US dolor in the coming months.
In Part 2, Technical Analysis, I look at different technical indicators to decipher the GBPUSD currency pair possible upside breakout move.
For more information about Winning Edge Forex System, please visit www.winningedgeforex.com. Dr. Gandevani’s latest book titled: Winning Edge Trading: Successful and Profitable Short and Long-Term Systems and Strategies, available at Amazon.com provides more detail information for a simple but powerful trading system.
The British Pound’s Upside Breakout – Fundamental Analysis by Dr. Ned Gandevani
Among major factors that influence the exchange rate price level are differentials of interest rate, inflation, and Gross Domestic product between two countries, US and UK. In this article, I analyze each of the afore-mentioned factors and project a probable future upward move for British pound against US dollar.
Fundamental Analysis
Interest Rates Differential – When there is a difference between interest rates between two countries, it’s assumed that investors prefer to invest in the country with higher interest rate to gain better returns. Accordingly, the currency of a country with a higher interest rate tends to appreciate against the currency of a country with a lower interest rate. As depicted in Figure 1, the US Dollar Libor rate has dropped from 0.28469% on May 4, 2010 to 0.26300% on February 1, 2011. Conversely, the British pound Libor rate has increased from 0.55469% to 0.6000% for the respective dates. This is considered a positive factor for Pound Sterling appreciation against US dollar.
Figure 1 – Comparison between US-Libor and GBP-Libor for the past 10 months from May 2010 to February 2011.
Inflation Rates Differential – Another major factor that influences the exchange rate between US dollar and British pound is the differential between these two countries. Investors perceive a better growth and higher interest rate for a country with a high inflation rate relative to another country with lower inflation rate. If the Consumer Price Index is used as a proxy for inflation rate for each country, there is an increase for the UK’s CPI versus the US CPI’s since May 2010 to January 2011. The UK’s CPI annual rate of change moved up from 3.4% to 4.0% while for the US, it moved up from negative 0.10% to 0.4%for the respective dates. As the Figure 2 illustrates, the relative inflation growth for the UK has grown more than US. This in turn translates to a positive factor which contributes to the appreciation of the UK’s currency British pound against the US dollar.
Figure 2 – Comparison between US-CPI and UK-CPI percentage changes since May 2010 to January 2011. Date Sources: US Bureau of Labor Statistics and UK Government Statistics.
Gross Domestic Products Differential – In addition to interest rate and inflation differentials, Gross Domestic Product differential between two countries influences the exchange rate between UK British pound and US dollar. Figure 3 exhibits a comparison between two countries GDPs. There is a clear diversion between US-GDP and UK-GDP. The US-GDP grew from 1.7% in the second quarter to 3.2% in the last quarter of 2010. Conversely, the UK-GDP shrank in the same time period from 0.35 to negative 0.5%. In other words, as the US economy expanded for the second half of 2010, while the UK economy due to austerity measures contacted. This discourages investors to invest in the UK resulting depreciation against the US dollar. However, due to other factors discussed earlier since May 2010 the British pound has appreciated against the US dollar from 1.42295 to 1.62622 in February 18, 2011.
Figure 3 – Comparison between US-GDP and UK-GDP percentage changes since May 2010 to January 2011. Date Sources: US Bureau of Labor Statistics and UK Government Statistics.
Overall, fundamental analysis as stated above lead us to believe that there is a better chance for the British pound to appreciate against the US dollar in the coming months. This is supported by lingering high unemployment rate above 9 percent in the US. The US stock market recovery has been mainly fueled by the US government stimulus programs along with high productivity measures implemented by companies. Due to massive layoff, remaining employees had to work harder and long hours to make up for the ones who were let go. However, as the inflation rate increases employers have to increase the salaries which cut in their profits. Furthermore, housing sector as a major consumers’ asset is still far from recovery with the huge inventory build ups and foreclosed houses still in the banks liquidation pipelines. Consequently, the British pound has a better chance to appreciate against the US dolor in the coming months.
Overall, fundamental analysis as stated above lead us to believe that there is a better chance for the British pound to appreciate against the US dollar in the coming months. This is supported by lingering high unemployment rate above 9 percent in the US. The US stock market recovery has been mainly fueled by the US government stimulus programs along with high productivity measures implemented by companies. Due to massive layoff, remaining employees had to work harder and long hours to make up for the ones who were let go. However, as the inflation rate increases employers have to increase the salaries which cut in their profits. Furthermore, housing sector as a major consumers’ asset is still far from recovery with the huge inventory build ups and foreclosed houses still in the banks liquidation pipelines. Consequently, the British pond has a better chance to appreciate against the US dolor in the coming months.
In Part 2, Technical Analysis, I look at different technical indicators to decipher the GBPUSD currency pair possible upside breakout move.
For more information about Winning Edge Forex System, please visit www.winningedgeforex.com. Dr. Gandevani’s latest book titled: Winning Edge Trading: Successful and Profitable Short and Long-Term Systems and Strategies, available at Amazon.com provides more detail information for a simple but powerful trading system.