Pound-to-Dollar Rate in the Week Ahead: Possible Reversal Higher Occurring
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- GBP/USD could be bottoming and turning higher
- Still a little early to say for sure and downtrend dominant
- Sterling’s main driver labour data
- Dollar eyes retail sales
The GBP/USD exchange rate is trading at around 1.2573 at the start of the new week after rising 0.4% from the previous week. Studies of the charts suggest the pair could be reversing and might go higher over the next five days.
The 4-hour chart - which is used to assess the trend over the short-term, which means the next 5 days - shows the pair was in a downtrend but then bottomed at the July 9 lows and started rising strongly. Momentum is strong and whilst it is still a little early to say for sure, this could be the beginning of a fresh new uptrend.
Note how the RSI momentum indicator in the lower pane has risen sharply in tandem with the bounce. It is now at the same level it was at when the exchange rate was much higher in the 1.27s, in June. This suggests upside momentum is especially strong and supports the possibility that a new uptrend could be beginning.
The pair already looks a little overstretched and may pullback initially, perhaps falling back down to 1.2550, however, after that it could very well recover and go higher.
A break above the 1.2595 July highs would provide confirmation of an extension of the bounce up to a target at the trendline at 1.2625.
The trendline is likely to pose a major obstacle to further upside and the exchange rate is likely to pause or pull-back at that level.
The daily chart shows how the pair is in an overall downtrend which has fallen to the January lows and bounced.
The bounce lead to three up days in a row (circled) and the special configuration of these days - the fact the first and third are long and green and the day in between is smaller - suggests a higher than average chance that the trend higher could continue.
Yet at the same time, the established trend is down and remains intact for now, thus the pull of the ‘tide’ is bearish.
The two conflicting signals make us cautious of making an outright directional call.
The conflicting signals suggest the pair may go sideways for a while.
Yet, a break below the January lows would provide confirmation the downtrend was extending down to a target at 1.2300.
Likewise, a break higher, especially if it is above the trendline at 1.2625, would confirm a reversal up to a target at 1.2700 and the 50-day moving average (MA).
The daily chart is used to provide an indication of the medium-term outlook which includes the next week to a month ahead.
The weekly chart meanwhile is showing no clearly definable trend and indicates the pair could meander sideways between the Jan lows and the March highs indefinitely.
A break higher to 1.2700 over the medium-term, however, could see gains extend to around 1.2900 in the long-term at the level of the major trendline.
After the pair is likely to find it difficult to break clearly above the trendline from a technical perspective and may consolidate underneath it for a while.
Likewise, a break below the January lows would probably confirm a bearish extension down to a target at 1.1915-1.1995 and the key 2016 lows.
The weekly chart is used to give an idea of the longer-term outlook, which includes the next few months.
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The Dollar: What to Watch this Week
The main release for the U.S. Dollar in the coming week is retail sales in June. The data is important because consumer spending remains the main contributor of growth in the U.S.
The Dollar has been under pressure recently due to expectations that the Federal Reserve is preparing to cut interest rates as a pre-emptive ‘insurance’ strike against future economic weakness.
An interest rate cut is likely to weigh on the Dollar since lower interest rates attract less net capital inflows from foreign investors looking for somewhere to park their money.
Only an extremely strong retail sales result would even begin to reverse expectations the Fed is getting ready to cut interest rates, and that seems unlikely according to analysts who are more biased to expecting a slowdown, albeit a modest one.
“In America, retail sales on Tuesday will provide the last piece of evidence on the consumer, before the Fed’s two-week ‘quiet period’ begins ahead of the July 31 rate decision. Forecasts suggest that retail sales slowed on a monthly basis in June, but remained in positive territory for a fourth straight month, which would be encouraging in itself.”
The data is out on Tuesday at 13.30 BST and is expected to show a 0.2% rise both in the core and the broader metric.
Other key data for the U.S. in the coming week is Michigan Sentiment indicator which is forecast to show a slight uptick to 98.5 from 98.2 in July when it is released on Friday at 15.00; and housing data which is forecast to show a slight fall in housing starts to 1.262m from 1.269m previously when it is released on Wednesday at 13.30.
The Pound: Inflation, Labour Market Data in Focus
The winner of the Conservative leadership election is not scheduled to be announced until July 22, so the Pound will probably be less affected by Brexit news in the week ahead and attention may shift to hard data instead.
On that front, there are three major releases, including labour market data out on Tuesday, inflation on Wednesday and retail sales on Thursday.
UK data has deteriorated recently, especially the PMI survey data which is seen as a reliable leading indicator of harder economic data and growth. Having said that, May GDP surprised to the upside, coming out at 0.2% when analysts had anticipated a 0.1% rise.
The last speech from Mark Carney, the governor of the Bank of England (BOE), was less optimistic and suggested the BOE was finally joining the rest of the ‘pack’ of central banks in adopting a preference for lower interest rates, mainly due to fears about global growth. This marked a turnaround from the previous bias of the BOE to raising rates.
On Tuesday, UK labour market data is forecast to show the unemployment rate still at 3.8%, another 22.9k jobs added to the economy and average wages rising by 3.1% in June, when it is released at 9.30 BST.
The data is at a fairly strong starting point so only an unexpected decline would dent Sterling - anything within expectations or higher would probably keep the currency supported.
Keep an eye on wage dynamics in particular as the rule-of-thumb in economics is that rising wages tend to lead to higher inflation, which prompts the central bank to raise interest rates to keep a lid on prices. And, a side effect of higher interest rates is a stronger currency.
The UK's wage dynamic has been a source of support for Sterling over recent months, with wages now easily oustripping the inflation rate which has in turn prompted expectations for a Bank of England interest rate rise in coming months.
The risk is that wage increases start fading in strength, which deprives the under-pressure Pound of one of its last remaining elements of support.
Inflation data out on Wednesday at 09:30 B.S.T. will be another key release to watch for Sterling, with a beat on expectations likely to prove supportive and a weaker-than-forecast figure likely to weigh.
Markets are looking for annualised CPI to read at 2.0%, bang on the Bank of England's mandated target.
Month-on-month inflation for June is forecast to show price increases of 0.3%.
The next most important release is retail sales data which is expected to show a -0.3% decline in June compared to the month before when it is released at 9.30 on Thursday.
Retail sales have been falling recently and survey data for June from the British Retail Consortium (BRC) suggests the decline will probably continue.
“Recent confidence surveys suggest the underlying trend in the retail sector remains soft, and the consensus expects another decline, of 0.3% month-over-month in June,” says Wells Fargo in a preview note.
A bigger-than-expected decline would stoke UK slowdown fears and weigh on the Pound.
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