Pound-to-Dollar Rate 5-Day Forecast: The Evidence Supporting More Upside
- GBP/USD is showing bullish indications
- Brexit headlines out over weekend on balance Sterling-positive
- Sterling could be driven by GDP, inflation data; Dollar by inflation data
Technical studies suggest the Pound should advance against the U.S. Dollar in the coming week and this view is supportive by marginally positive Brexit newsflow out over the weekend. Inflation data from both sides of the Atlantic will meanwhile dominate interest on the economic front.
The Pound-to-Dollar rate is trading at 1.2935 at the start of the new week just over a percentage point lower than where it started the preceding week and the technical forecast is on balance a bullish one.
The longer-term charts are showing discrete bullish signs; the monthly chart, for example, formed a ‘key reversal’ in January. These occur at the end of trends when prices reach a new low and then reverse and close higher than the close or the high of the previous period. When it happens on a daily chart it can be a strong reversal signal and when on the monthly, all the more so.
A daily key reversal, for example, formed on the S&P 500 at its 2007 highs just before the stock market started its huge bear market move during the great depression.
The key reversal month on GBP/USD also suggests a long-term trend reversal on the currency pair, only this time up.
GBP/USD is striking higher and has risen quite strongly from the end of December lows. After reaching the 50-week moving average (MA) it pulled back. Over the last 2 weeks, it has corrected back down in a relatively shallow correction.
When a strong up-period is followed by two smaller down-periods the probability the following week will be bullish is enhanced, and this suggests there is a circa 60% probability the week ahead will be an up week.
The one proviso is the 50-week MA, which is at 1.3200 and is a tough level of resistance for the pair.
The daily chart is also bullish as it shows the pair having formed a possible bull flag pattern. The rally up from the early January lows constitutes the ‘pole’ and the pull-back from the 25 January highs the ‘flag square’.
If the exchange rate breaks above the 1.3218 highs it will probably confirm a continuation higher to the next upside target, first at the 1.3300 September 2018 highs. Then end target generated by the flag is situated at 1.3600, which is based on the extrapolation of the length of the pole higher.
The 4hr-chart is slightly more ambiguous. It shows a short-term downtrend has established itself since the January 25 highs. This downtrend is slightly biased to continue falling since a proper reversal higher has not yet taken place.
The chart shows an unbroken step progression of lower lows (LL) and lower highs (LH) down, and this could still continue falling if the pair breaks below the Feb 7 lows at 1.2855. Such a break would see the trend extend down to the next support level at 1.2800.
At the same time, the chart also has bullish signs which cannot be ignored: the pair formed a bullish key reversal bar at the Feb 7 lows and had formed a higher high (HH) which was higher than the previous lower high (LH) - another sign the downtrend might be reversing.
The evidence that the pair is reversing higher is not conclusive yet but a break above the trendline at about 1.3000 would be further strong evidence, as well as a move above 1.3100, or the establishment of two or more sets of higher highs (HH) and higher lows (HL).
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The U.S. Dollar: What to Watch
The main release for the Dollar is probably inflation data out on Wednesday. This is especially true given the Federal Reserve’s communication to markets in January that it would shift to a more data-driven stance when considering future interest rate moves.
A higher-than-expected inflation result would probably be positive for the U.S. Dollar and vice versa for a lower result as it suggests the Fed might have reason to deliver further interest rate rises in 2019.
Current expectations are for CPI to show a 0.1% rise in January compared to December. This is higher than the -0.1% result in the previous month.
On a yearly basis, inflation is expected to have risen by 1.5% in January compared to a year ago, compared to 1.9% in December also on a year-on-year (yoy) basis.
Higher inflation puts pressure on the Fed to raise interest rates which in turn attracts higher inflows of foreign capital drawn by the promise of higher returns, and this increases demand for the host currency.
“On Wednesday of next week, financial markets will get a look at CPI numbers for January. For a “patient” and “data-dependent” Fed, these inflation numbers are key,” says a note from the economics team at Wells Fargo. “In December, there was evidence that a number of factors have been driving inflation higher. That was easy to miss because the headline measure was pulled down by falling energy costs and lower commodity prices. Ex-energy, CPI rose 0.2% month-over-month in December and is up 2.1% over the past year.”
Another key release is December retail sales data on Friday, which has been delayed because of the government shutdown. December is also a key month because of the significance of Christmas sales.
“Thursday of next week offers the first look at how the year finished for the nation’s stores and online vendors. This is a particularly important month as it includes most of the key holiday shopping outlays that can make-or-break a store’s year in terms of profitability,” say Wells Fargo.
The market forecasts a rise of 0.1% compared to the previous month, Wells Fargo is more optimistic at 0.3%; the previous month of 0.2%. Measures of consumer confidence, however, have slipped in recent months suggesting the data may not be so strong.
The final key release for the U.S. Dollar is small business optimism or the National Federation of Independent Businesses (NFIB) optimism gauge. This used to be at all-time high in Q3 2018 but has since pulled back. The big question is whether it will decline further or not. The consensus expectations is for more loses to 103 from 104.4 previously.
The Pound: What to Watch this week
Brexit remains the key driver for Sterling with the currency being a function of the markets expectation for a 'deal'or 'no deal' Brexit.
Markets are currently confident a deal, of some sort, will be achieved, hence the Pound's outperformance during 2019.
Weekend news is constructive in this manner amidst news the government has sought to buy Prime Minister Theresa May more time to put together a workable Brexit deal by promising MPs another say by the end of the month, as business leaders said the process was now in the “emergency zone”.
Communities secretary James Brokenshire has said that if no finalised deal were put to the Commons by 27 February, MPs would again be given an amendable motion to consider. This would give them the chance to block a 'no deal' departure or make other interventions.
Markets will likely focus on the prospect of parliament being given another shot at blocking 'no deal', we believe this should prove supportive to Sterling.
May will make a statement to parliament on February 13 updating lawmakers on her progress so far in seeking changes to her deal. The debate on February 14 will be on a motion — a proposal put forward for debate - about Brexit more generally. However, because May is clearly engaged in negotiations with the EU, parliament is expected to give the PM more space and votes of significance will only likely be expected later in the month, in line with Brokenshire's guidance.
The main data release for Sterling is Q4 and December GDP data out at 9.30 GMT on Monday, February 11.
The data will provide investors with further hard evidence of how Brexit uncertainty, as well as the global slowdown, is affecting the UK economy.
“So far, we have seen only mixed signals from the economy, although the more up-to-date PMI data suggests businesses and individuals are delaying their purchasing plans as the Brexit debate enters crucial stage with the March 29 exit date fast approaching,” says Fawad Razaqzada, a market analyst at Forex.com.
Current market expectations are for GDP to slow to 1.4% compared to a year ago (from 1.5% in Q3) and to rise 0.2% compared to the previous month of November. A deeper slowdown might have a temporary short-term negative effect on Sterling but it could also focus minds on avoiding a hard-Brexit and, therefore, ultimately have a positive impact on the Pound, if it reduces the chances of ‘no-deal’.
“On top of this, Brexit will remain in focus as a desperate UK Prime Minister Theresa May struggles to renegotiate the withdrawal agreement with the EU leaders,” adds Razaqzada.
Also released at 9.30 on Monday morning are Manufacturing Production data, with the headline expected to show a rise by 0.2% in December, Industrial Production, which is forecast to rise 0.2% and Business Investment, which is expected to rise by 0.2% quarter-on-quarter in Q4.
Inflation data out on Wednesday at 9.30 will be of interest. Usually, it is important for the Pound but this time it may be overshadowed as Theresa May could be making another major Brexit updating speech on that day.
“UK CPI will also be released on Wednesday. Although important, in the grand scheme of things, not many people will pay much attention to it because of Brexit, as mentioned above. Anyway, headline CPI is expected to have eased to +1.9% from +2.1% previously while core CPI is expected to have remained unchanged at +1.9%,” says Forex.com’s Razaqzada.
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