GBP/USD 5-Day Forecast: Short-term Bullish But a Hefty Week of U.S. Data Awaits

• Recovery from oversold conditions can extend
• 1.2350 a potential short-term target
• But gains likely to remain limited in nature
• U.S. calendar is busy, dominated by Powell speech
• And U.S. payrolls data which is out Friday

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The Pound to Dollar exchange rate looks to recover from oversold conditions at the start of October which means further advances over the coming days can be realised, especially if a packed U.S. data and event calendar suggests the economy has cooled further.

The Pound is some 7.0% below its mid-July highs following a steady multi-week selloff that looks to be well entrenched and liable to extend lower over the coming weeks.

That said, the pace of the selloff pulled the GBPUSD exchange rate into oversold territory with the RSI on the daily chart falling to as low as 20, which signals an asset that is deeply oversold.

Above: GBPUSD reached deeply oversold conditions last week (see RSI below 30 in lower panel), and the unwinding of these conditions are in play over the coming days.

The exchange rate has subsequently bounced from a low at 1.2110 and the question for the coming days is how far this counter-trend rebound can go.

Shaun Osborne, Chief FX Strategist at Scotiabank says the short-term technical setup for Pound-Dollar is bullish, but ultimately any gains over the coming days are considered corrective in nature.

"Solid gains for the GBP through late week price action have taken spot back to the opening levels of the week. The GBP sell-off looks oversold as well and correction risks are strengthening, based on a potentially bullish close on the week," he says.

He adds that any corrective gains over the coming days could extend to 1.2350 in the short run.

"We see a sideways trajectory for GBPUSD in the near term, with the US economy holding up better than elsewhere and a gradual recovery into the year-end toward 1.24," says Thomas Flury, a Strategist at UBS.

The UK data and event calendar is barren and the focus for markets this week is firmly on the U.S. where a slew of data releases are in focus.

The U.S. ISM Manufacturing PMI is due Monday at 15:00 BST, markets are looking for a reading of 47.8 for September, from 47.6 previously.

"Upcoming US data, like the ISM manufacturing and nonfarm payrolls, are unlikely to stall current USD momentum, in our view. The releases are likely to be robust and help keep the dollar well-bid," says Dominic Schnider, a Strategist at UBS.

Federal Reserve Chair Jerome Powell is then scheduled to speak at 16:00 BST, in what could amount to the most pivotal event of the week, provided he touches on monetary policy.

Recall that it was Powell's message that U.S. rates would remain elevated for an extended period of time that prompted the market to sell U.S. Treasuries, in turn jacking up their yield in what amounted to a market-negative event.

"Markets digest the message from the Fed of a possible last hike and only two interest rate cuts next year, and we have seen financial conditions continue to tighten," says DNB's Østnor.

For the Dollar, the rising yields proved supportive. Does Powell say something that cements the message from the September 20 policy update, or does he strike a more 'dovish' tone in light of the recent move in yields?

If the latter, then the Dollar can retreat further.

Tuesday sees the release of JOLTs job openings at 15:00 BST, which should give an indication as to how the labour market is evolving. We actually saw last month's release prompt a market reaction so we will be watching the August release.

The ISM non-manufacturing PMI is due for release at 15:00 BST where a figure of 54 is expected, which would be consistent with an ongoing and robust expansion of the U.S. economy.

Such an outcome would not be a surprise in itself given the U.S. outperformance theme is now well understood, therefore the bigger market reactions would lie with an undershoot.

The week ends with the all-important release of U.S. non-farm payrolls that tend to give the final word on how the jobs market is evolving.

The headline is expected to print at 150K and a beat would prove supportive of the Dollar as it would likely shore up U.S. yields as markets bet the Fed has little choice but to go with another rate hike in November.

But an undershoot would see such expectations ease, potentially resulting in Dollar weakness ahead of the weekend.