Pound-to-Dollar Rate Week Ahead Forecast: Continuation Higher Possible, 'Pennant' Pattern Cited

Modified: Monday, 04 February 2019 08:28 GMT

- GBP/USD could rise as short-term uptrend extends

- Recent pull-back has formed possible pennant pattern

- BOE meeting main event for Pound; ISM Services gauge for the Dollar

The Pound-to-Dollar exchange rate is trading at 1.3074 at the start of the new week after falling almost a percentage point in the week before, mainly as a result of the Brexit impasse seen not only in the UK parliament but between the EU and UK.

Although GBP/USD has pulled back as a result of Brexit deadlock it has done so in a shallow correction and we remain bullish at the start of the new trading week, seeing risks favouring an extension higher in line with the established short-term uptrend.

The pair has already broken above a long-term trendline after rising from off of the December 2018 lows and this was a strong bullish indicator for the pair.

After the trendline break, GBP/USD consolidated and then followed through strongly to the upside, further solidifying the bullish case. Last week it reached the 50-week Moving Average (MA) at 1.3221, however, and pivoted lower.

Major MA’s often exert a bearish effect on uptrending prices and bearish selling pressure from the MA coincided with the fundamental shift in Brexit politics, resulting in a correction lower.

The pair is now trading back down on support provided by the 200-week MA, which is currently propping it up. "Three GBP/USD slides held close to the 200-DMA (now 1.3042) last week," says Jeremy Boulton, an analyst at Thomson Reuters, adding this major technical mark has "encouraged dip buyers adding to longs at elevated levels".

GBP/USD also appears to have formed what looks like a bullish pennant continuation pattern, which is a sign of more upside on the horizon.

The pennant recalls the triangular flags of old and indicates a probable continuation higher conditional on the exchange rate breaking higher. If the pair can move above the 1.3217 highs that would be a very bullish sign. If it can move above 1.3300 that would add further confidence since that would confirm a clear break above the 50-week MA too.

The next target higher is at roughly 1.3405 calculated by extrapolating the length of the pennant’s ‘pole’ higher from the base of the consolidation. It could be reached in a week or two.

The RSI momentum indicator supports the bullish forecast. It is now higher than where it was when the exchange rate was at 1.3298 back in September 2018. This suggests the pair may possess ‘pent-up’ bullish potential, which could express itself in the week ahead.

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The Dollar: What to Watch this Week

The U.S. Dollar kicks off the week on a solid footing after a better-than-forecast ISM Manufacturing release out at the end of last week saw the Dollar turn around and head higher.

Markets set aside the non-farm payroll report, out hours earlier, and chose to focus on the ISM Manufacturing Report as it offers the most up-to-date snapshot of U.S. economic activity, whereas the jobs report was more backward looking.

The sense we get is that the U.S. economy might not be as soft as the recent market narrative suggests, and therefore if markets start pricing in a stronger economy we could expect a stronger Dollar over coming weeks and months.

The next main release will be a major sentiment survey in the services sector, the ISM Non-Manufacturing PMI in January, which is forecast to show a fall to 57 from 58 previously when results are published on Tuesday at 15.00 GMT.

The ISM is thought of as a leading indicator for the economy so it could impact on the Dollar.

However, judging by the ISM Manufacturing report out last week, the risks are skewed to the upside.

Another major release for the U.S. Dollar is Factor Order data for November, out on Monday at 15.00, which is forecast to show a rebound of 0.2% in November following a decline of -2.1% in the month before. Here too a better-than-anticipated result could see upside for the Dollar (but downside for cable).

The Pound: What to Watch this Week

Brexit will be the primary focus for Sterling markets in the week ahead with focus likely to be trained on whether Prime Minister May can squeeze any compromises out of the EU in regards to the Irish backstop.

Writing in the Sunday Telegraph this weekend, May said she would return to Brussels with a "fresh mandate, new ideas and a renewed determination".

MPs have voted to seek an "alternative arrangement" to guarantee the Northern Ireland border stays open after Brexit.

Once again, this weekend saw the Irish deputy prime minister say "there are no credible alternative arrangements" to the proposal.

There is a seemingly intractable deadlock in place between the UK and EU on the matter, and we wonder if this week will give us any new information on the matter.

Unless no new information that sheds clarity on the deadlock is offered we would expect the Pound to consolidate.

The main calendar event in the week ahead for the Pound is the meeting of the Bank of England (BOE) on Thursday at 12.00 GMT.

This meeting is more important than most because it will also include the BOE’s official quarterly economic forecasts, and a press conference with the BOE chairman Mark Carney afterward.

Whilst no interest rate changes are expected, the forecasts will speak volumes about the Bank’s assessment of the state of the economy, and could impact the Pound. Carney’s comments will also be closely parsed for a steer on future stance.

Data has been mixed recently and if the BOE’s assessment is negative it could weigh on Sterling - likewise a more resilient outlook would strengthen the Pound as it would make a case for multiple interest rate hikes in the event of Brexit uncertainty being removed.

Given a backdrop of heightened global growth fears and increased Brexit uncertainty the consensus seems to be tilted towards expecting a more sombre and cautious message from the Bank which would weigh marginally on Sterling.

“Policymakers had already taken a more cautious stance at the last meeting in December as the Brexit uncertainty dragged on and given the heightened anxiety about the global growth outlook since then, the Bank could go one step further and signal fewer rate hikes than currently being projected for the next three years,” says Raffi Boyadjian, currency analysts at FX broker XM.com.

The other main data release for the Pound is Construction and Services PMI for January.

The week starts with the release of Construction PMI on Monday at 9.30 GMT, with estimates for a decline to 52.4 from 52.8 previously.

Services is out on Tuesday at 9.30 and is expected to drop to 51.0 from 51.1 in the previous month.

A greater than expected decline in PMIs may well be an early warning sign of a decline in the broader economy since PMIs are seen as leading indicators, and this could weigh on the Pound. Likewise, a surprise rise, suggesting underlying resilience, could strengthen Sterling.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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