British Pound Forecasts for December

GBPUSD Long-Term Technical Forecast

The long term bearish objective for the GBPUSD remains below 1.3680. The bulk of December will probably see the GBPUSD trace out a 4th wave correction, which could reach as high as 1.6696 (38.2% of 2.0162-1.4554 and 4th wave of one less degree extreme).

GBPUSD Fundamental Outlook/Interest Rate Forecast

The typically interest rate-sensitive British Pound/US Dollar currency pair has largely grown indifferent to rate forecasts, and we see that yield expectations have become far less relevant in predicting price movements for the British currency. After aggressive rate cuts from the Bank of England, markets have understandably scaled back expectations for the future of BoE monetary policy easing. All the while, interest rate traders continue to price in aggressive US Federal Reserve interest rate cuts through the near term. The combination of both factors would have normally been enough to lift the British Pound against its US counterpart, but we see that markets have remained far more sensitive to developments in risky asset classes.

The British Pound was previously one of the highest-yielding currencies of the G10, and that fact made it one of the most sought-after major currencies across forex markets. Yet speculative capital has more recently fled high-yielders in favor of the safe-haven US Dollar and Japanese Yen. Any further deterioration in global financial conditions would signal a continuation of said trends, and it seems that British Pound forecasts will largely depend on the future of financial risk appetite. If we see further recovery in UK equity markets, the British pound could quite easily rally further off of its recent multi-year lows against the US Dollar.

British Pound/US Dollar Valuation Forecast

GBPUSD Valuation Forecast: Neutral

The British Pound has been under heavy fire over the last several months, spiraling lower against the US Dollar to initially overshoot beyond its PPP value and now to find itself a mere 169 pips in the overvalued column. Importantly, the sterling was the single worst performing currency against the greenback last month, giving up 3.49%. Should this momentum continue, GBPUSD could well slip to undervalued positioning. The interest rate outlook bolsters this scenario, with substantial monetary easing still ahead for the Bank of England.

What is Purchasing Power Parity?

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. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.

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