Pound-Dollar Rate Week Ahead Forecast: GBP/USD Decline Likely to be Limited by ‘Hard Floor’
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- GBP/USD selling-off after formation of double top
- More downside expected in short-term
- Heavy-duty support to limit weakness in lower 1.27s
The Pound-to-Dollar exchange rate opens the new week at 1.2774 after falling 1.24% in the week before.
Studies of the charts suggest immediate mild weakness on the horizon followed by a sideways trend and the possibility of eventual upside in the long-term.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the formation of a bearish topping pattern called a double top.
The double top is an ‘M’ shaped pattern which is a reliable indicator of impending weakness.
Normally we could expect a substantial break lower to follow, however, some strong support levels lie not far south in the 1.2700- 1.2730 range, and these are likely to provide a hard floor from which the exchange rate may bounce.
The RSI momentum indicator has fallen below the 30 level distinguishing neutral from oversold, suggesting a risk the pair may rebound.
This combined with the tough support floor suggests a possibility it could end its sell-off in the lower 1.27s and then perhaps enter a rangebound market with a ceiling in the 1.28s in the short-term.
The daily chart shows the double top reversal pattern quite clearly and also the reason why downside will probably be limited to the lower 1.27s, since that is where the 200-day moving average (MA) is situated.
Large MAs often provide strong levels of support or resistance to price on charts, and the one on Cable is expected to provide a floor at 1.2700.
If the exchange rate touches it, it will probably bounce and recover back up to the 1.2800 - 1.2900 level.
There is a chance it may trade sideways between these two levels for the rest of the month, which covers the medium-term, which we use the daily chart to analyse.
The weekly chart shows how the exchange rate has risen up and broken above a major trendline, giving the new uptrend a huge boost in the process.
The next obstacle is the 200-week MA, which is situated not far above the exchange rate.
The pull-back which seems to be underway in the short-term will probably be limited by support from the 50-week MA and 200-day MA in the 1.2730 - 1.2700 region, and if not that then by the trendline not far below.
Eventually, more upside is possible as there are signs of renewal.
Not only has the recovery since the summer been especially forceful and steep - a sign this is probably not a correction of the downtrend but more likely the start of a new uptrend - but it is also showing the outline of a 5-wave Elliot wave, which is itself a bullish sign.
This Elliot wave could the start of a new longer-term cycle higher.
Looking at it more detail we see that it is currently forming what looks like a wave 4 corrective wave.
Wave 4’s are usually the longest and shallowest waves in the uptrend.
It would suggest the possibility the pair will trade sideways for a while before rising up in a final 5th wave higher, perhaps as high as 1.35.
The weekly chart is used to give an idea of the longer-term outlook, which includes the next few months.
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GBP this Week: Polls and Important Data
The Pound has entered a short-term trend lower against the U.S. Dollar since the start of November, owing to both broader U.S. Dollar strength and the paralysis that has hit the UK currency owing to ongoing political uncertainty.
We believe Sterling is reflecting the Conservative's 10 point lead over Labour in the polls, the assumption is that the advantage is enough to deliver a majority government that will swiftly deliver Brexit in the new year under the terms of the EU-UK Brexit deal struck in October. But 10 points is not enough to guarantee a majority in Parliament, and betting markets suggest bookies are seeing the odds of a Conservative majority at only 40%.
This suggests the prospect of the looming election breaking the deadlock on Brexit is not assured, and this will only provide further uncertainty to weigh on the Pound.
We would expect Sterling to break out of its recent ranges should polls suggest either the Conservative's lead has grown, or shrunk. The general rule of thumb is that should it shrink the Pound will come under pressure, should it grow then the Pound can find some upside momentum.
Away from politics, focus turns to key economic numbers, with third quarter GDP out on Monday, labour market numbers on Tuesday, inflation figures on Wednesday and retail sales on Friday
"We have a busy week ahead of us in terms of economic data releases, which will be interesting in the light of the dovish message sent by the Bank of England last week," says Aila Mihr, Senior Analyst at Danske Bank, adding:
"Given the weak PMIs, growth seems to remain sluggish but there might have been a positive contribution from stockpiling ahead of the previous 31 October Brexit deadline. On Tuesday, the jobs report for September is due out, which will be interesting, as the last couple of reports have shown decreasing employment. On Wednesday CPI inflation for October is due out and retail sales for October are out on Thursday."
Third quarter GDP is forecast to read at 0.4% when released at 09:30 GMT, an improvement on the previous quarter's -0.2% reading.
Tuesday's average earnings data (with bonus) is forecast to read at 3.8% when released at 09:30 GMT, unchanged on the previous month. A beat would be positive for Sterling, a miss would be negative.
The three-month-on-three-month employment change is forecast to read at -90K.
Wednesday's headline inflation rate is forecast to read at 1.6% year-on-year for October, down slightly on September's 1.7%.
We would expect any currency reaction to the above data to ultimately be short-lived as the market remains focussed on the General Election.
Looking for the Dollar's Dominance to Extend
The Dollar has been in recovery mode in November, with the Dollar index - a measure of broad-based Dollar strength - rising from 97.10 on November 01 to 98.02 at the time of writing.
It appears that some of the Dollar's strenght stems from the Federal Reserve's message to markets on October 31 that ithey are unlikely to cut interest rates again at their December meeting.
The view that the economy does not need further support from the Fed will be reinforced by this week's data, should it come out on the strong side.
"In the US, CPI core for October is due out Wednesday. The last couple of months, CPI core has surprised on the upside, but we do not expect this to be the beginning of a new trend given the low inflation expectations," says Mihr.
The Core CPI inflation figure is forecast to read at 0.2% month-on-month when released at 13:30 GMT on Wednesday. A beat would likely be supportive of the USD, a miss would likely undermine the currency.
On Friday, retail sales for October are due for release.
"The past couple of months, retail sales have come in weaker, reflecting lower but still decent consumption growth. In light of the weakness in the manufacturing sector, we will keep an eye on whether private consumption growth can keep up the pace. While a negative surprise is long overdue given the volatility of the time series, fundamentals still look strong," says Mihr.
Markets are looking for a reading of 0.2% month-on-month for October when released at 13:30 GMT.
Keep an eye on a number of speeches from Federal Reserve board members.
"The Fed speeches after the October cut suggest most FOMC members, even the doves, think the current stance of monetary policy is appropriate and that data need to deteriorate further before it will cut again. We expect the FOMC members to send the same signal next week, in particular when Powell speaks before the US Congress on Wednesday," says Mihr.
Should the message be consistent with the view that no immediate interest rate cuts are required, we would expect the Dollar's recent trend of appreciation to extend.
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