Pound-Dollar Week Ahead Forecast: February Highs Enter Pipeline as Data Dominates

- GBP/USD in breakout mode with 1.4240 targeted
- 2018 high nears 1.4377 possible further down line
- Fed minutes, USD & UK data set agenda this week
- While new virus risks seep onto fringes of radar

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Pound Sterling starts the new week higher against most major currencies having convincingly overcome 1.40 against the Dollar in the previous week, where the U.S. currency was itself lifted almost across the board in often-volatile trading.

The Pound-to-Dollar exchange rate led Sterling to the top of the rankings and it could ascend further toward its late February highs over the coming days if UK economic data pans out the right way and the greenback remains on the defensive.

Meanwhile, the Dollar was left on shaky ground Friday when April’s U.S retail sales missed expectations, helping to reverse gains that had built swiftly when other figures showed U.S. inflation rising to its highest since September 2018 last month.

That prompted a sell-off in the bond market and short-lived gains for the Dollar, though not against Sterling, which evaded the greenback after being lifted by a first quarter GDP surprise and relief after earlier election-related risks passed without event.

“Cable is maintaining a strong uptrend that should see it target the 1.41 level in short order,” says Juan Manuel Herrera, a strategist at Scotiabank. “Markets may sit on the GBP for a few days at least until Tuesday’s April jobless claims and March’s employment report to gauge how the economy fared in the early reopening days.

The U.S. Dollar rose against most major counterparts but is down against most rivals over a one-month horizon and will start the new week with the Pound-Dollar exchange rate knocking on the door of 1.41.

Above: Pound-to-Dollar rate shown at daily intervals with selected moving-averages and Fibonacci retracements of January fall.

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Sterling's attention will be on a pending raft of data releases that should provide some indication of if the economy will be able to live up to lofty market expectations for this year during the quarters ahead.

First up for the Pound is a series of speeches from Bank of England (BoE) policymakers who take to digital stages on Monday before unemployment, inflation and retail sales figures for last month are released at 07:00 on Tuesday, Wednesday and Friday respectively.

These numbers will all be important to the Pound given the extent to which the government's faster vaccination programme has lifted expectations for the economy, which has been an integral factor in lifting Sterling into second place among major currencies for 2021.

“GBP/USD has eroded 1.4018 and is on target for 1.4238/45, the recent high and the March 2018 high. It remains bid while dips hold above the uptrend at 1.3760,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

“Our longer term target is 1.4377 the 2018 high,” Jones says.

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Most notably on the central bank front this week, BoE Monetary Policy Committee member Gertjan Vlieghe will participate in a virtual panel discussion titled "What Next for Monetary Policy?" at 16:30 on Monday.

This is before April’s job data are published the next morning, from which consensus is looking for the UK unemployment rate to have held at 4.9% and inflation to have risen from 0.7% to 1.4% last month.

Meanwhile, the U.S. calendar falls quiet with only minutes of the April Federal Reserve meeting to chew on from Wednesday, the decision from which initially ignited a widespread Dollar sell-off until U.S. bond yields began to rise again and eventually succeeded in drawing investors back to the Dollar.

“Cable decisively broke above 1.40 and even the material upside surprise to the US April CPI was not enough to bring the cross below the psychological level. We see the impact of the recent US CPI on GBP/USD as a one-off and temporary and look for a further trend higher,” says Petr Krpata, chief EMEA strategist for interest rates and FX at ING.

The April retail sales data due out at 07:00 on Friday and May’s round of IHS Markit manufacturing and services PMI surveys that could have the most impact on the Pound.

Above: Pound-to-Dollar rate shown at weekly intervals with Fibonacci retracements of 2018 fall.

Those will provide insight into consumers’ propensity to spend coming out of ‘lockdown’ as well as the current health of key sectors.

Economists are looking on average for retail sales to have risen at a month-on-month pace of 4.5% in April, down from 5.4% previously, while the all-important services sector PMI is expected to rise from 61.0 to a new record high of 62.2.

The Dollar’s reaction to April’s inflation reading may mean Sterling is also sensitive to surprises at 07:00 on Wednesday, although the Bank of England (BoE) has already said it won’t be drawn into lifting interest rates by any temporary increases in price pressures.

Economic data will dominate the week ahead for the Pound, although there could also be chatter in some parts of the market about the government’s warnings about the dangers of emergent editions of the coronavirus gaining a toe hold in the UK, though there’s little risk of that disrupting the economic recovery this week.

“For now, the reopening is proceeding unchecked with pubs and restaurants in England readying for indoor dining starting Monday. We see the GBP regaining the 1.41 mark in the coming days,” says Scotiabank’s Herrera.