GBP/USD Week Ahead Forecast: Uptrend Alive, but Brexit Delay Decision and Technical Resistance Stand in Way of Near-Term Sterling Gains
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- GBP/USD to continue uptrend following trendline break
- Next target the 200-week MA
- Pound to be moved by EU decision on Brexit delay
- U.S. Dollar by GDP, Payrolls and ISM Manufacturing data
The Pound-to-Dollar exchange rate starts the new week at 1.2821 having fallen 1.17% in the week prior. Studies of the charts suggest a multi-week uptrend will likely eventually extend, however technical studies suggest the exchange rate might struggle in the immediate-term.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair has been pulling back recently after bullishly breaking above a key long term trendline.
The pair has pulled back down in an ‘abc’ pattern which is quite a common corrective pattern.
This is probably just a temporary correction before the pair goes higher again, and a break above the 1.3012 October 21 highs would provide confirmation of a continuation of the uptrend to a target situated at 1.3140.
If the correction continues, it is likely to find support at the trendline and the 200-day moving average (MA) both situated at around 1.2720.
The daily chart shows the pair pulling-back in the midst of an uptrend and how a break back above the October 12 highs would reinvigorate the uptrend and lead to a continuation up to a target at 1.3140.
In the case of the daily chart, there is also a suggestion of a higher bullish target in the upper 1.32s.
The pair has breached a long-term trendline and this is a bullish sign. One commonly used method for forecasting how far prices are likely to go following a trendline break is to take the height of the move immediately prior to the break and extrapolate it higher.
On GBP/USD this move is labeled ‘x’. and when it is extrapolated higher after the break it results in a move labeled ‘y’ which ends at around 1.3275.
Ultimately, this is only a hypothetical target and our base case is for the pair to hit 1.3140. After that, there is a heightened risk it could pause and go sideways for a time.
The daily chart is used to analyse the medium-term trend, which is the next week to a month of price action.
The weekly chart shows why 1.3140 is such an important target - it is where the 200-week MA is situated and, therefore, the level is likely to present a tough obstacle to more upside.
Whilst there is a high risk of a pull-back at the level of the 200-week MA, the pair will probably eventually recover and resume its uptrend higher, reaching a possible, arbitrary target at 1.3500.
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 Pound this Week: EU Decision on Brexit Extension Key
This was supposed to be the week the UK left the EU, instead politicians will be left strategising around a Brexit extenions, the length of which could determine whether the Government takes another crack at passing Brexit legislation or pushing for a General Election.
The Pound is however likely to remain supported in the week ahead as the chances of a ‘no-deal’ Brexit remain negligible whilst other outcomes - successful implementation of the government’s deal, a general election, and a referendum - are all relatively benign from Sterling's standpoint.
Monday could be the day the EU will announce the length of the Brexit extension, however resistance from France to a lengthy delay are making EU discussions on the matter more protracted than might be expected.
France see little reason to grant a long extension because the UK are not offering any credible reason for such a delay: recall the EU have consistently said a delay will only be considered were the UK to hold elections or a referendum.
If a long delay is agreed, to January 31, Prime Minister Boris Johnson will push hard for an election, but he needs a two-thirds majority in Parliament to do that, which would require the support of the Labour party, which is currently undecided.
Labour leader Jeremey Corbyn has expressed concern that if he supported a general election it would lead to parliament being dissolved and could open the door to the government delivering a hard-Brexit ‘by stealth’ in the interim. He says wants assurances from Johnson that a ‘no-deal’ could never happen, before giving his backing to a general election.
However, the sceptic would point to Labour's dire polling for the hesitancy.
Either way, markets have taken a bullish stance on Sterling when the odds of Johnson's deal passing rises, and it falls when those odds fall.
"We see prospects of an early election as negative for GBP given that it would tame optimism about the withdrawal agreement being reached – the key driver of GBP gains this month – and reintroduce uncertainty into Sterling," says Petr Krpata, a foreign exchange strategist at ING.
More delay and uncertainty surrounding an election are likely to on balance have a bearish impact on Sterling.
On the economic data front, the most important release is Manufacturing PMI for October out on Friday at 10.30 BST and forecast to show a fall to 48.1 from 48.3.
The PMI is a survey-based gauge of sentiment and activity in the sector under examination. The improved mood music around Brexit and global trade means there is a risk of a slightly better result lending Sterling mild support.
Expect economic releases to play second-fiddle to Brexit developments.
The U.S. Dollar: What to Watch this Week
On Wednesday Q3 GDP data is forecast to show a slowdown to 1.7% from 2.0% previously, when released at 13.30 GMT.
A lower-than-expected reading will weaken the U.S. Dollar whilst a higher-than-expected reading will strengthen it.
The risks appear to be tilted to lower-than-forecast reading, according to U.S. bank Wells Fargo, which expects a 1.4% result.
“GDP growth likely moderated in Q3 to a 1.4% annualised pace, down from 2.0% in Q2. Last quarter, the consumer saved the day, as personal consumption (PCE) rose at a 4.6% pace and offset a 1.0% decline in business fixed investment (BFI). Businesses were first to pull back spending amidst the trade war, but with no end in sight to the current stalemate, cracks are beginning to materialise in the consumer, the bedrock of the U.S. economy,” says Wells Fargo.
On Wednesday evening at 19.00 BST the Federal Reserve will hold its next policy meeting to decide on where to set interest rates.
The Fed is highly likely to cut the official U.S. interest rate from 2.0% to 1.75% but this is now so widely expected it is already priced into the U.S. Dollar so is unlikely to have an impact.
What is more significant is whether the Fed assesses that the economy is in need of future rate cuts or not. If it does, then the U.S. Dollar could weaken on expectations of future rate cuts since these tend to dampen foreign capital inflows.
Marios Hadjikyriacos, an analyst at FX broker XM.com, is of the view that there is a slight risk the Fed may have shifted to a more hawkish longer-term outlook (meaning in favour of keeping rates higher), which could support the Dollar.
“The market probability for a rate cut next week is 90%,” says Hadjikyriacos. “The Fed has a very strong habit of not disappointing the markets. Now they are going to cut but since that is more or less already priced in the reaction, the reaction of the Dollar will depend mainly on the signals they send for future rate cuts. On that front I do not think they will commit to anything - I think they will keep their cards held close to their chest... But, if anything, it might be a slightly more hawkish message than the markets are expecting.”
Two more major data releases lie at the end of the week, with Non-Farm Payrolls (NFPs) and ISM Manufacturing on Friday.
NFPs are expected to show a 90k rise in payrolls in October, when data is released at 13.30. The data needs to be viewed in the context of a country which is at full-employment.
As important is average earnings, which is forecast to rise at a higher 3.0% from 2.9% previously. Earnings have more impact on growth and inflation and a high figure could push up the Dollar regardless of the headline payrolls number.
October ISM Manufacturing PMI is the other major release and it is forecast to show a recovery to 48.8 from September’s dismal 47.8.
Last month the market fell after ISM Manufacturing and Non-Manufacturing both fell much more steeply than had been expected since these are key metrics for the performance of the economy.
A recovery, therefore, would be seen as ‘saving’ the day, and probably lead to a rebound in the U.S. Dollar.
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