Pound / Dollar Week Ahead Forecast: Correcting Higher if Dollar Eases On Fed Risks

• GBP/USD support building near 1.3411, 1.3352
• Resistance at 1.3502, 1.3536, 1.3568 & 1.3650
• Risk of volatility ahead on Fed & PCE headlines
• FOMC minutes, inflation, Fed leadership in focus
• GBP taking cues from PMI data & BoE speeches

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The Pound to Dollar rate has attempted to stabilise above November’s new 2021 low and could be likely to correct higher over the coming days if uncertainty about a White House decision on the leadership of the Federal Reserve prompts a momentary retrenchment of the greenback.

Sterling was the best performing major currency for the five days to Monday and was one of only two majors to notch up a gain over the greenback last week after UK economic data encouraged confidence in the parts of the market that are betting the BoE could lift Bank Rate in December.

The Pound-Dollar rate entered the new week having held above 1.34 despite the greenback extending a multi-month advance against all other major currencies with the sole exception of China’s Renminbi last week.

Gains for U.S. exchange rates have lifted the U.S. Dollar Index to its highest since early in 2020 but it left the barometer’s path higher road blocked by a formidable technical resistance level at the opening of what will be an important week for the Fed policy outlook.

“When it comes to central banks, there will be one point of focus next week, and that is: Who will take the helm of the world’s most important financial institution, the Federal Reserve? Biden is expected to announce his nominee before Thanksgiving (25 November). Powell is favoured to take a second term, but Lael Brainard, if nominated, could create some short-term volatility,” says Daniel Been, head of FX research at ANZ.

Above: Pound-Dollar rate shown at 4-hour intervals with Fibonacci retracements of October’s decline indicating possible areas of technical resistance.

• GBP/USD reference rates at publication:
  Spot: 1.3440
• High street bank rates (indicative band): 1.3070-1.3165
• Payment specialist rates (indicative band): 1.3320-1.3375
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

Financial markets have most recently begun to wager confidently that the Fed is likely to lift its interest rate as soon as June or July next year, with overnight-indexed-swap rate suggesting on Monday that it would raise the benchmark Fed Funds rate twice before the end of 2022.

That’s due to recent and ongoing developments around inflation and the U.S. labour market, although the above assumptions could be called into question by investors this week if the White House decides to nominate a new candidate to lead the Fed from February next year.

“Looking ahead, the October FOMC minutes as well as President Biden’s Fed Chair pick can point at a volatile Thanksgiving week for the USD. Recent client discussions have suggested that a surprise nomination of Lael Brainard, while not our central case, can upset the USD bulls,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB, writing in a research note last week.

The White House is widely expected to announce its preferred candidate at any point this week and there’s a chance that it could decide to nominate an alternative to the incumbent Jerome Powell whose current term comes to an end in February 2022.

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“While this Powell Fed is clearly dangerously dovish already, Brainard’s focus on financial inclusion, climate scenarios, and Fed patience all open the door for even slower normalization. Maybe she will become more pragmatic if inflation fear turns to outright panic in the streets, but the market’s initial read will be that she will normalize even slower than Powell,” says Brent Donnelly, president of Spectra Markets and a veteran currency trader.

“EURUSD shorts are big enough now that a Brainard win will hurt. I would think you could see a 100 pip EURUSD rally on Brainard over one or two days,” Donnelly wrote in a Friday note to clients.

While Spectra’s Donnelly, Credit Agricole’s Marinov and ANZ’s Been have warned of scope for volatility and declines in the Dollar following any decision to appoint a new Fed chair, not all analysts are in agreement about the likely impact of such an outcome on the Dollar.

Some say that it would matter little for the greenback, although if anything can be said with confidence it’s that such a decision wouldn’t be bullish for the U.S. currency and so could be likely to provide support to the Pound-Dollar rate at the least.

Above: U.S. Dollar Index shown at weekly intervals with major moving-averages indicate possible areas of technical support while Fibonacci retracements of 2020 fall indicate likely areas of technical resistance.

“Markets are nervously awaiting the announcement of who President Biden will nominate to head the Fed after Powell’s current term ends in February,” says Steen Jakobsen, chief investment officer at Saxo Bank.

“The nomination news could generate significant short-term volatility on the choice of the nominally more dovish Lael Brainard over current Fed Chair Powell, though we see little difference in the medium-longer term implications,” Jakobsen also said on Friday.

With the Dollar Index near its highest in more than a year and financial markets fully pricing-in an interest rate lift-off for by the middle of 2022 it’s possible that uncertainty over the future leadership of the Fed will lead the greenback to soften during the opening half of the week.

“It seems that many positives are already in the price of the USD. We further note that the Fed language has not changed all that much to justify the recent market moves. The increasingly overbought and overvalued USD can thus be vulnerable to potential more patient Fed guidance from here,” Credit Agricole’s Marinov also said last week.

A softer greenback would be supportive of the Pound-Dollar rate although there’s also a danger that on Wednesday the U.S. unit is lifted and Sterling burdened by the next instalment of PCE inflation figures and minutes of November’s Fed meeting.

Above: Pound-Dollar rate shown at daily intervals with selected moving-averages and Fibonacci retracements of June decline indicating possible areas of technical resistance.

“The market stays offered while capped by the 55-day ma at 1.3648. We are only looking for a minor corrective bounce and suspect it will not make much impact beyond 1.3599/1.3607,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Wednesday’s core PCE price index is the Fed’s preferred measure of inflation and is likely to be scrutinised closely by the market at 15:00 mid-week, with the data out just hours ahead of the 19:00 release of minutes from this month’s Fed meeting.

North American traders will be out for the Thanksgiving weekend from Thursday, which is when Sterling will more than likely take its cues from Bank of England Governor Andrew Bailey and chief economist Huw Pill who’re set to address audiences on Thursday and Friday respectively.

Governor Bailey will participate in a moderated discussion with Mohamed El-Erian at the Cambridge Union at 17:00 on Thursday while Huw Pill is set to speak about the economic outlook at an event hosted by the Confederation of British Industry at 13:00 on Friday.

“There is a risk that the BoE raises interest rates in December 2021. Interest rate markets have not fully priced‑in a December rate hike. As a result, there is a risk GBP ends the year slightly above our 1.34 forecast,” says Carol Kong, a currency strategy associate at Commonwealth Bank of Australia.

“We forecast GBP will appreciate over 2022 because we expect that the global economic recovery will become more entrenched. We forecast GBP will rise to 1.40 by the end of 2022,“ Kong and colleagues wrote in a forecast update last week.