The Pound-to-Dollar Rate in the Week Ahead: Charts Point to Continuation Higher

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- GBP/USD tipped to rise as uptrend extends

- Bullish engulfing candle adds to confidence

- Sterling dominated by Brexit; Dollar  eyes Fed

The Pound-to-Dollar rate is to begin trading around 1.3285 Sunday after rising more than 2.0% in the previous week, although the exchange rate still has further to climb over the coming days, according to technical studies of charts.

The pair rose after the UK Parliament voted to take ‘no-deal off the table' during a tense week during which lawmakers rejected Prime Minister Theresa May’s deal for a second time. MPs also voted for an extension to Article 50. The week's events pushed the Pound to new 2019 highs against the Dollar.

From a technical perspective, charts are showing a bias towards more gains. Despite a deep correction at the beginning of March, the pair remained above the trendline from its December lows. It's since formed a bullish engulfing candlestick pattern on the weekly chart that improves the odds of continued gains.

Above: Pound-to-Dollar rate shown at weekly intervals.

A break above the 1.3380 highs would signal a continuation of the trend up toward a probable target of 1.3475. At that point the exchange rate will encounter a minor obstacle in the form of the R1 monthly pivot where it will be at risk of a reversal lower.

The odds are that Sterling will be able to overcome this obstacle and continue on toward the 1.3575 area, which coincides with the 200-week moving-average. The only negative indicator on the charts is divergence between the exchange rate, which is making new highs, and the RSI momentum indicator in the lower panel that is not.

This non-confirmation is called ‘divergence’ in technical analysis and is a bearish indicator. On its own however, it's not enough to confirm a change of trend is in the offing, although it could be a sign the exchange rate is about to undergo a pull-back.

Above: Pound-to-Dollar rate shown at daily intervals.

The Dollar: What to Watch

The main event for the U.S. Dollar is the meeting of the U.S. Federal Reserve (Fed), which ends on Wednesday, March 20.

Since no actual change in interest rates is foreseen, the main focus will be on the Fed’s economic forecasts, the updated dot-plot diagram which shows the Fed’s expectations for the future course of interest rates, and the commentary of Fed Chairman Powell.

The market is currently not expecting any further interest rate rises from the Fed in 2019. This contrasts with the Fed’s own projections based on the dot-plot which sees them making roughly two more interest rate hikes in 2019.

There is a risk, however, that the Fed could revise down their dot-plot - which hasn't been updated since December -  more in line with market expectations, and that this could precipitate a decline in the Dollar.

Individual Fed member’s comments in 2019 indicate a shift in stance towards a more ‘wait-and-see’ stance which could precede a change in the official dot-plot on Wednesday.

“Policymakers sent a clear signal that they won’t touch the hiking button again for at least a few months, or perhaps not at all, depending on how risks evolve – most notably the slowdown in US and global growth. The message was well understood by traders, with market pricing for rate hikes in 2019 evaporating instantly. In fact, futures markets now indicate a modest probability for rate cuts this year, not hikes,” says Marios Hadjikyriacos, an economist at FX broker XM.com.

On the hard data front, the main releases are probably manufacturing and services PMIs for March out on Friday. These are an important indicator of momentum in the economy and therefore carry a lot of weight with investors

PMI’s are surveys of purchasing managers within companies. Given current concerns about U.S. growth, investors will be eager to see what the results are for the most recent PMI surveys in March.

The market expectation is for manufacturing PMI to rise to 53.7 from 53.0, and services to remain unchanged at 56.0. A result of over 50 indicates expansion and below contraction.

Factory Orders in January is expected to show a rise of 0.3% from 0.1% previously when it is released at 14.00 on Tuesday. The Philadelphia Fed manufacturing index is forecast to show a rise to 5 in March from -4.1 previously, when it is released at 12.30 on Thursday.

Slowdown fears relating to the U.S. housing market will be brought into focus on Friday when existing home sales data for February is released and forecast to show a 2.2% recovery after falling -1.2% in the month before.

The Pound: What to Watch

The main fundamental driver for the Pound in the week ahead is probably developments in the Brexit process, with the Bank of England (BOE) meeting on Thursday also likely to cause volatility.

It is highly likely that the government will try, for the third time, to get its Brexit deal approved by Parliament, or failing that, that the EU will require a lengthy delay of article 50.

The latest reports from Brussels are suggesting the EU may try to make a delay conditional on either the UK having a second referendum, a general election or a very firm plan.

It is suggested this may focus minds, especially amongst Brexiteers who could fear a hijacking of Brexit if there is a delay. This will put pressure on them to accept the government’s negotiated deal.

The two most likely scenarios, therefore, are that Theresa May’s deal finally gets approved on a third attempt, or that Brexit is delayed on the condition of a referendum or general election being held.

Both would be very positive for the Pound, which compliments the overall bullish technical outlook.

The BOE meeting on Thursday, at 12.00 GMT, could also impact on Sterling. There is a risk the BOE may change its statement to reflect the recent slowdown in the economy. If so the Pound is likely to suffer.

Up until now, it had been assumed Brexit risks were the only thing stopping the BOE from raising interest rates, but the slowing economy may be providing them with other reasons not to.

“The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias,” says Raffi Boyadjian, an economist at XM.com.

From a purely hard data perspective, the main releases are employment data out on Tuesday, inflation data out on Wednesday and retail sales on Thursday.

Labour market data is expected to continue showing signs of strength, when released on Tuesday at 9.30. The unemployment claimant count is expected to have risen by only 2.7k in February - a relatively low count - the unemployment rate is forecast to be stuck at a historic low of 4.0% in January, and overall payroll count to have risen by 120k in December, according to consensus estimates.

More important for Sterling, perhaps, is average earnings in January, since this has more influence over Bank of England (BOE) policy.

If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation will probably rise and so will interest rates - with expectations increasing that the BOE will raise them, and this will drive Sterling higher. Higher interest rates are positive for the Pound because they attract and keep greater inflows of foreign capital.

Inflation is out on Wednesday and is another key metric for the Pound. As explained above inflation influences BOE policy which impacts on the currency. In January inflation came out surprisingly lower after falling -0.8% compared to December. If inflation is also shown to be negative in February it could really drive down the Pound. Current expectations, however, are for a 0.2% rise.

Thursday sees another major data release, in the form of retail sales in February, out at 9.30. This is forecast to show a -0.3% fall from 1.0% previously. A deeper-than-expected decline, however, could trigger more weakness for Sterling.

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