Pound-Dollar Week Ahead: Steadying on Charts amid Upbeat Sentiment but Downside Risks Abound

- GBP reclaims 1.24 but faces immediate obstacles on charts.

- Key moving-averages, major Fib level bar path above 1.2658.

- As technical and fundamental risks stack up, analysts say sell.

- Risk appetite, UK lockdown exit plan and Q1 GDP data in focus.

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- GBP/USD spot at time of writing: 1.2357
- Bank transfer rates (indicative): 1.2034-2121
- FX specialist rates (indicative):  1.2172-1.2244 >> More information

The Pound-Dollar rate recovered its footing ahead of the weekend but faces immediate obstacles on the charts and a number of downside risks in the week ahead, while increasing numbers of analysts are tipping it as a sell.

Sterling tentatively reclaimed the 1.24 handle Friday as the Dollar softened amid an upbeat mood in global markets, and in spite of a record job loss being revealed by the April non-farm payrolls report.

Risk assets were buoyed and the Dollar weakened when U.S. and Chinese officials said they are on track to implement the phase one deal struck in January, tempering earlier concerns about a potential fresh bout of tensions between the two, while speculation about a possible shift to negative interest rates at Federal Reserve (Fed) also weighed on the greenback. But despite widespread Dollar weakness the Pound-Dollar rate still ended the week with a -0.77% loss after being weighed down by expectations the Bank of England will increase the size of its quantitative easing programme in June, as well as fresh concerns about an absence of progress in the Brexit talks.

"We think downside risks continue to build in cable. Indeed, we are short the pair in our model portfolio, and we look for a move toward an initial target of 1.1850. In addition to our broader expectation for USD strength to reassert itself, we note that Brexit risks are starting to surface once again. Against the backdrop of a UK economy in free-fall, we think this could provide an additional bearish impulse to the pound in the weeks ahead," says Jacqui Douglas, chief European macro strategist at TD Securities.

The Pound will enter the new week with investors digesting Prime Minister Boris Johnson’s lockdown exit plan that’s due to be announced Sunday night and while facing immediate technical obstacles on the charts. But general investor sentiment and the trajectory of global stock markets will also be an important influence on Sterling in the short-term, with gains for risk assets likely to limit any losses for the British currency.

Above: Pound-Dollar rate at daily intervals. Steadying, but trapped below 61.8% Fibonacci retracement and key averages. 

The PM is widely expected to extend the 'lockdown' into June although speculation has it that some restrictions could be eased this week. The UK is the last developed world country to set out a plan for a partial easing of restrictions on daily life and the danger is that investors perceive this week's move to reopen the economy as being too slow, which might see Sterling suffer as a result. Markets will want to see a clear roadmap toward a full lockdown exit.

"A top structure probably formed during April while spot remains below resistance of 1.2657-1.2711 (double top or head and shoulders). The RSI profile remains bearish below 60. The MACD histogram is diverging. Medium and long term GBP/USD trends have a bearish bias. We go short GBP/USD in May targeting 1.2030 and possibly 1.1885," says Paul Ciana, chief technical strategist at BofA Global Research.

Investors will give their verdict on the plan overnight and into Monday as Sterling faces pushback from the 55-day and 21-day moving averages located around 1.2435 and 1.2441 respectively on the charts. This is after closing for a seventh consecutive week below the 61.8% Fibonacci retracement of the 2020 downtrend  following a five-day long retreat from the 200-day moving average near 1.2658 that was reached the prior Friday. 

The Pound-Dollar rate has been roadblocked by the nearby 1.2520 and 1.2658 levels for nearly two months and with momentum now waning, technical analysts are increasingly tipping the exchange rate as a sell. BofA’s Ciana says April price action looks like a “top that precedes a May decline” and is looking for a fall back toward 1.20, although he’s not alone. 

“GBP/USD retested the 1.2247 21st April low which has so far held. Failure here would push the April low at 1.2163 to the fore. A drop below there is needed to alleviate upside pressure and refocus attention on 1.1491, the 2016 low, and also theMarch low at 1.1409. Rallies will find initial resistance at 1.2436 (55 day ma) ahead of the 200 day ma at 1.2653," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Jones says Sterling will “will find initial resistance at 1.2436 (55 day ma) ahead of the 200 day ma at 1.2653,” and is looking for the exchange rate to remain “capped” by its 200-day moving average in the weeks ahead. She advocated Friday that Commerzbank clients sell the Pound at 1.2369 and again at 1.24, targeting a move down to 1.21 over the coming days. She also forecasts a fall to fresh post-1985 lows will play out over the next three months or so. 

Above: Pound-Dollar rate at daily intervals. Steadying, but trapped below 61.8% Fibonacci retracement and key averages.

The Pound-Dollar rate charts are turning bearish just as the fundamental headwinds begin to mount again. Seasonal factors leave Sterling liable to weakness against the Dollar in May anyway but the UK is now the last major country to exit ‘lockdown’, which condemns the economy to underperformance right at a point when the the Brexit ghost is returning to haunt the currency. 

European Trade Commissioner Phil Hogan told RTE last week he believes UK negotiators have little intention of striking a trade deal and every intention of blaming the coronavirus for any damage caused to the economy should an 'Australia deal' Brexit, the same as a 'no deal Brexit', play out at year-end. 

"We continue to target GBPUSD 1.20 medium term, in the expectation that the combination of shattered growth, low inflation, the worst Covid-19 death rate in Europe and the prospect of full monetization of extraordinary extra debt issuance (while not being a reserve currency) will work their wonders on GBP as time progresses. We also anticipate a difficult set of EU trade negotiations this month and next, ultimately raising the possibility of the UK definitively not asking for an extension of talks by the end of June, dashing the hopes of many," says Shahab Jalinoos, head of FX strategy at Credit Suisse.

Bank of England monetary policy, Brexit and its potential long-term effect on the economy are expected to weigh increasingly on the currency later in May and into June if the government remains opposed to an extension of the Brexit transition period. Opposing an extension leaves the government with less than seven weeks to make substantial progress in the negotiations where so-far, progress has been “limited”. Brexit negotiations continue this week, with Thursday likely to bring the next update from negotiators. 

In the meantime, the trajectory of the Pound will be dictated by the market response to Johnson’s lockdown plan and investor risk appetite, with any fresh terseness in rhetoric between the U.S. and China likely to inspire weakness. Wednesday’s GDP data might also get a limited once-over from the currency. The data are due out at 07:00 and are expected to show the economy contracting by -2.5%. The size of the fall anticipated by the consensus is modest in comparison to what's expected for the second quarter although this is only because the 'lockdown' wasn't put into place until the final week of March.

"We see GBP as remaining vulnerable based on our expectation that there will be an extension to the QE programme at next month’s MPC meeting coupled with the fact that Brexit risks remain and due to the fact that the UK government has come under a hail of criticism for its handling of the coronavirus crisis," says Jane Foley, a senior FX strategist at Rabobank. "In view of both economic and political risks in the UK we expect GBP to push lower. We see scope for a dip towards GBP/USD 1.19 on a 3 month view."