Pound-to-Dollar Rate Week Ahead Forecast: More Declines Expected as Bear Trend Extends
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- GBP/USD to continue falling in established trend
- Support levels in the 1.18-1.19s to be temporary floors
- Pound to be driven by labour data; Dollar by inflation
The GBP/USD exchange rate is trading at around 1.2023 at the start of the new week, having fallen a further 1.10% in the week prior.
The exchange rate has declined by 5.64% thus far in 2019, and technical studies of the charts suggest the pair will continue falling in line with the dominant downtrend.
The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair in a steady downtrend which has accelerated recently and is likely to continue.
A break below the 1.2020 level would probably signal a continuation down to a target at the 1.1915-25 October 2016 lows, followed by the level of support at a major trendline at 1.1875.
The RSI momentum indicator is converging bullishly with price action, increasing the risk the pair will stall once it hits these support levels. Convergence happens when prices make a new low but momentum does not. It is a sign of waning bearish momentum.
On its own, however, it is not enough to suggest the downtrend will stall immediately and the exchange should carry on selling off as trend direction trumps all other considerations.
The daily chart shows how the pair is declining in what is probably ‘measured move’ price pattern which suggests further downside on the horizon as the measured move completes.
The pattern is composed of 3-waves like a zig-zag, and the final 3rd wave down (c-d) usually of a similar length as the first wave (a-b). This indicates a probable ending for the pattern at 1.1790, and suggests a possible undershoot of the trendline and October lows.
Bearish confirmation has, in large part, already been met after the pair broke below the 1.2079 lows, however, a move below the 1.2020 level would provide further confidence of a continuation lower.
The daily chart shows how the trend could play out over the medium-term, meaning the next week to a month.
The weekly chart - used to give an idea of the longer-term outlook, which includes the next few months - shows the pair in a long-term downtrend which according to the market maxim “the trend is your friend” is likely to continue.
After reaching 1.1790 - the target on the daily chart - the pair will probably bounce given it constitutes an undershoot of the trendline and therefore an extreme extension.
Eventually, over the long-term, however, the pair will probably reach a downside target at 1.1500.
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The U.S. Dollar: Inflation and Retail Data in Focus
The main economic data releases for the U.S. Dollar in the coming week are inflation and retail sales data out on Tuesday and Thursday respectively.
Inflation data is forecast to show a quicker 0.3% rise in July after 0.1% in June, and a 0.2% rise for core inflation which leaves out volatile food and fuel components, when it is released at 13.30 BST on Tuesday.
There is a risk inflation could undershoot expectations due to oil price volatility, and an over exaggeration of the potential impact of increased tariffs on Chinese imports, according to analysts at U.S. bank Wells Fargo.
Lower inflation is negative for the Dollar as it reduces interest rate expectations which attract greater inflows of foreign capital when they are higher.
“Energy prices declined in May and June, leading to back-to-back, modest 0.1% increases in headline CPI following more substantial gains in the prior three months. Core consumer prices showed some signs of life in June, rising 0.3% on the month, breaking a string of 0.1% gains during the past four months. That being said, the inflation backdrop remains tame as we look ahead to the second half of the year,” says Wells Fargo.
Wells Fargo economists estimate the latest round of tariffs would add a little over 0.1 percentage points to the year-over-year rate of CPI inflation. This relatively small increase is largely because goods make up only a fraction of the CPI.”
The other main release for the Dollar is retail sales which is forecast to show a 0.3% rise in July from 0.4% rise in the previous month, when it is released at 13.30 on Thursday.
Retail sales should remain buoyant as long as the labour market remains strong:
“Aside from a decline in February, retail sales have increased every month so far this year. That’s consistent with the elevated confidence data and suggests consumers remain comfortable with their spending habits despite increased risks to the outlook,” says Wells Fargo.
The data will impact on the U.S. Dollar if it changes interest rate expectations materially. Lower rates would be negative for the Dollar as they would reduce foreign capital inflows.
Currently, the market is expecting the Federal Reserve (Fed) to cut rates lower than is justified, according to Marios Hadryiacos, an investment analyst at broker XM.com.
“We have seen bets on lower interest rates in September soar... A 25 basis points rate cut is fully priced in. Very similar to the July meeting we also have some expectations for a 50 basis points more aggressive rate cut. I believe the Fed is only likely to cut by 25 again, and the conditions are very similar to what happened in July,” says Hadryiacos in a week ahead preview.
“We have seen some of the most dovish Fed members come out and say maybe we should wait a little and see the effects of the latest rate cut, we shouldn’t rush it, so they very well might cut but I very much doubt it will be by 50 basis points. Now what does that mean for the Dollar? Market pricing is essentially overly dovish at the moment. So if we see Fed officials push back against this over dovishness by the market in coming weeks, that could help the Dollar to recover a little bit, at least in the near term,” he adds.
The Pound: Slew of Data on Tap
The main drivers of the Pound in the coming week are likely to be Brexit politics, employment data on Tuesday, inflation data on Wednesday and retail sales on Thursday.
We note Brexit sentiment to be the overriding driver of Sterling: the market is in an ongoing process to lighten exposure to Sterling amidst rising expectations that the EU and UK will part ways without a deal on October 31.
“The Brexit story is by far the most important driver for the currency. The logic behind this is quite simple: if you manage to solve the political crisis most of the economic problems go away as well, investment picks up, uncertainty dissipates and growth reaccelerates,” says Marios Hadjikyriacos, an investment analysts at XM.com.
The only thing which can stop the Brexit juggernaut from going over the cliff now is a general election, however, this is unlikely to happen until after the summer recess in September, “so there is very little prospect for a rebound in the Pound over the next month, at least,” adds Hadjikyriacos.
But, the sharp drop in Sterling in response to last week's poor GDP reading served as a reminder that markets are still watching economic data.
Indeed, news that the UK economy shrank 0.2% in the second quarter of 2019 suggests that the economy - long a source of support for the Pound - is starting to flag.
We could see further selling triggered by any disappointing data readings this week.
We are particularly wary of a poor print in the wage growth data out on Tuesday.
Labour market data is forecast to show the claimant count rising by 42k in July, the unemployment rate staying at 3.8%, and average wages including bonuses rising 3.7%, when released at 9.30 BST on Tuesday.
3.7% is a fast rate for wages to be rising and ordinarily would lead to increased expectations the Bank of England (BOE) might have to intervene to cool down the economy by raising interest rates, however, this is unlikely to be the case, given the recent poor growth data and backdrop of Brexit risks.
Inflation data is expected to show a 1.9% rise in July compared to a year ago when it is released at 9.30 on Wednesday, which is almost exactly on the 2.0% BOE target rate.
Retail sales is forecast to show a -0.3% fall in July compared to the previous month when released at 9.30 on Thursday, and a 2.6% rise compared to a year ago. Both would mark a slowdown from the 1.0% and 3.7% in June.
If data comes out in line with market expectations it will probably lead to a stabilisation in the Pound, since it will reflect an economy growing at about the ‘right’ pace - or the goldilocks level, as economists are fond of calling it.
“The U.K. economy has shown varying goldilocks elements in recent months, and all three data bowls of economic porridge may be on display next week. Wage growth is, perhaps, in the “too hot” category, with average weekly earnings forecast to quicken further to 3.7% year-over-year for Q2...July retail sales are forecast to fall 0.3% month-over-month, which would be the third decline in the past four months...Finally, July CPI inflation released next week will likely remain close to the “just right” category...We believe the Bank of England is likely to remain on hold for some time,” says Wells Fargo in a preview note.
Given the surprising -0.2% slowdown in GDP growth which pushed the Pound down on Friday, there is a possibility the slowdown could be reflected in slightly worse than expected economic data in the week ahead, and if so the Pound could take a further hit.
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