GBP/USD Week Ahead Forecast: Staying Constructive

• GBPUSD upside targets identified
• Autumn Statement in focus midweek
• Look for PMIs to surprise and boost GBP

Image © Adobe Images

The Pound to Dollar exchange rate remains in a constructive technical setup that can see gains extend over the coming days which feature the Autumn Statement on Wednesday and the PMI survey for November on Thursday.

GBPUSD reached its highest level since mid-September last week at 1.2506 thanks to a below-consensus U.S. inflation print and jobless claims.

Pound Sterling's progress was undermined by UK inflation data, which printed softer than the market was expecting, as did UK retail sales for October. But Shaun Osborne, Chief FX Strategist at Scotiabank, says the outlook for GBPUSD remains constructive in the near term.

"The pattern of short-term trade remains constructive, and the broader technical setups still suggest directional risks are tilted to the topside," he says in a note.

Osborne says GBPUSD is effectively consolidating within a bull pennant pattern and that "firm support on GBP dips at 1.2375 this week is keeping the undertone bullish. Gains through 1.2420/25 — close to current spot levels should be GBP - supportive."

A rise above this 1.2455 target could invite a subsequent move to 1.2525.

Imre Speizer, a strategist with Westpac Bank, says there's potential for Pound-Dollar to reach 1.2600 during the weeks ahead, particularly if the recent run of U.S. data disappointments continue.

Above: GBPUSD momentum is positive near-term (holding above 21-day EMA). The 38.3% Fibonacci retracement level is offering some immediate-term resistance.

Speizer acknowledges that U.S. drivers, such as softer labour and inflation data, have been the primary determinants of GBP/USD direction over the past month, helping arrest a sharp fall in UK-US yield spreads.

But this week sees only second-tier data out of the U.S., which could limit GBPUSD volatility.

"If you ignore PMIs on Friday (which Americans will). Existing home sales, Philly Fed, durable goods orders, and University of Michigan survey data are all second-division stuff," says Kit Juckes, FX analyst at Société Générale.

We might have to wait for the first half of December for the USD side of the equation to light up; "will see plenty of data points to disturb Christmas lunches: ISM on the 1st, NFP on the 8th, CPI on the 12th, FOMC on the 13th and retail sales on the 14th," says Juckes.

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The UK offers more interest with the Autumn Statement due Wednesday, which should see the government lay out updated tax and spending plans.

Such budget announcements can considerably impact the Pound's value, which fell to near-record lows just over a year ago when Liz Truss's government delivered its ill-fated mini-budget.

Both the Pound and Truss fell as markets fretted about the ability of the UK to pay for the hefty tax cuts and spending increases the new government proposed.

But, the era of Sunak and Hunt is a more considered one that places sustainable finance at its heart, and for this reason, we see very low odds of a major decline in the Pound following 2023's Autumn Statement.

Above: "UK still has only limited headroom" - Lloyds Bank.

The government will be tightly constrained by the UK's fiscal position, limiting the scope for tax cuts and spending increases.

But there are signs that the thrust of the focus will be on helping boost businesses ahead of a consumer-focussed budget statement in the spring of 2024.

If the government convinces markets it has done enough to boost UK productivity, the Pound could benefit.

"Speculation has built around a cut in inheritance tax. And extending corporation tax full expensing, which is currently due to end in 2026, looks likely, in conjunction with other measures to boost investment," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

Above: UK PMIs, image courtesy of Lloyds Bank.

Thursday sees the release of the PMI survey for October, and we expect Pound exchange rates to move on any surprises.

The S&P Global/CIPS manufacturing November PMI is forecast at 45.0 in November, up from 44.8 in October. Services are expected at 49.6, largely unchanged on October's 49.5. The headline Composite PMI is expected at 48.8, also marginally unchanged on 48.7 previously.

"November's flash PMI is likely to signal an economy stuck in the doldrums. October's composite PMI was in contractionary, sub-50, territory for the third successive month, and the forward-looking balances of the S&P Global/CIPS surveys remained downbeat," says Goodwin.

If the data deviates to the upside, the Pound can benefit, particularly given market sentiment towards the UK economy is already poor.