Pound-Dollar Week Ahead Forecast: Fed Chatter and RMB Trend Key

- GBP/USD support at 1.41, struggling with 1.4240
- Jobs, PMI surveys & FOMC speak key this week
- BoE speech up for GBP, RMB moves key for all
- PBoC pushback in FX could lift EUR, other FX

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• GBP/USD reference rates at publication:
• Spot: 1.4225
• Bank transfers (indicative guide): 1.3827-1.3974
• Money transfer specialist rates (indicative): 1.4090-1.4150
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The Pound-to-Dollar exchange rate enters a holiday shortened week near the top of a tight range that has gripped it through much of May, the upper and lower bounds of which could be tested if-not overcome by Federal Reserve (Fed) policy talk or developments in Renminbi exchange rates.

Pound Sterling briefly rallied off 1.42 during the Asia session on Monday but appeared to falter around 1.4240, where it’s met resistance on many occasions in recent weeks.

The Pound faces a quiet week ahead in terms of domestic influences once beyond a 16:00 Tuesday speech from Bank of England (BoE) Governor Andrew Bailey titled “Building a Finance System Fit for a Clean, Resilient and Just Future.”

Governor Bailey’s speech isn’t a monetary policy speech so probably won’t impact Sterling but could nonetheless be insightful for the market given how no one single financial system exists in a vacuum.

“Cable now looks well supported at 1.4100 and may eventually head higher as the UK data are expected to be solid in coming months and the gradually appreciating EUR/USD should also benefit GBP/USD,” says Petr Krpata, chief EMEA strategist for FX and interest rates at ING.

For the Dollar and wider market there could be two-way risks over Tuesday and Wednesday in addition to on Friday as key U.S. data is released, and as Fed policymakers update on their possibly-evolving views of their $120bn per month quantitative easing programme.

Above: Pound-to-Dollar rate shown at daily intervals alongside Dollar Index.

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Better than expected U.S. figures are an upside risk for the Dollar though Euro and Renminbi price action is also likely to be important given the Euro’s large share of the trade-weighted Renminbi and Sterling’s large share of the trade-weighted Euro.

This is after Monday’s pushback from the People’s Bank of China (PBoC) on what it calls speculation that lifted Renminbi exchange rates across the board last week, leading the trade-weighted or overall Chinese exchange rate to reach new three year highs at a point when it’s not clear the country’s economy is actually in a position to generate such strength, which might be indicative of a disruptive external influence.

“This has been a tool utilized in the past to manage capital inflows and was last used in China in 2007. It’s a small move, but defined by its symbolism as it flags some degree of discomfort from the PBoC with recent moves in USD/CNY,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

“At this point, we wouldn’t equate this to the infamous 2015 devaluation. This appears to be more management of inward capital flow,” Rai adds.

The PBoC said it would raise the foreign exchange reserve ratio requirement of domestic banks from 5% to 7% from June 15; meaning it has instructed commercial banks to buy foreign currencies, which is something that could encourage speculators to buy those currencies beforehand.

Above: BMO Capital Markets graph showing USD/CNH alongside one-month 25-delta risk-reversal.

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“RMB appreciation (or a prolonged period of USD weakness) could easily become headaches for policymakers. We expect additional administrative tools to be deployed by the PBoC through the remainder of the 6.30s,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

In relation to USD/CNH and as the above BMO graph shows; the one-month 25-delta risk-reversal measure of volatility on Renminbi and Dollar options (pictured above) is, while drawing on a form of financial rocket science, indicates the risk of a turn higher in USD/CNH.

If Chinese commercial banks are to buy foreign currencies themselves at any point they might be likely to buy those most relevant to the Chinese economy, which means that other market participants who’re looking to get ahead of them ought to take a look at the China Foreign Exchange Trade System (CFETS) Renminbi Index and also the trade-weighted Euro index.

China’s desire to disentangle itself from the U.S. Dollar’s web is well known so it might be unlikely to go buying very much of the U.S. unit; the Euro, its satellite currencies potentially including Sterling and some emerging market currencies may be seen rising notably at various points.

Above: China Foreign Exchange Trade System index basket of currencies.

“We noted last week that USD/CNH had depreciated faster than expected. One factor weighing on USD/CNH has been the fall in China’s services imports. Closed borders has meant many Chinese are holidaying and studying in China, rather than going abroad. The shrinking services trade deficit has further boosted China’s current account surplus and supported CNH,” says Kim Mundy, a strategist at Commonwealth Bank of Australia.

“GBP/USD will likely trade heavy near the lower‑end of its 1.4100‑1.4235 range in the short term. There are no policy‑relevant UK economic data releases this week. Beyond the short‑term, we continue to expect GBP to edge higher versus USD and EUR underpinned by favourable valuation and the fast improvement in UK economic activity,” Mundy adds.

Meanwhile, and back over in the U.S., Institute for Supply Management (ISM) surveys of the manufacturing and services sectors are widely expected to confirm a stimulus-pumped U.S. economic recovery is in play before the latest non-farm payrolls report.

Last month non-farm payrolls missed market expectations by a country mile, potentially setting a low bar for an upside surprise of reduced expectations this time around when the data are released at 13:30 on Friday: consensus looks for around 670k increase, up from the 266k seen last month.

Federal Reserve policymakers are set to deliver various speeches and the market is likely to listen closely for signs the bank is moving its stance.