Pound-Dollar Week Ahead: Charts Warn of Correction as Geopolitical Tenions Rise and Data Looms

Modified: Sunday, 09 August 2020 20:40 BST
Written by: James Skinner

- GBP/USD seen heading lower in 1.28-to-1.32 range this week.
- As USD rebounds amid multiple threats to investor sentiment.
- GBP downside seen limited with Q2 GDP & job data looming.

GBP/USD spot rate at time of writing: 1.3054
Bank transfer rate (indicative guide): 1.2697-1.2788
FX specialist providers (indicative guide): 1.2858-1.2937
More information on FX specialist rates here

The Pound-to-Dollar exchange rate capitulated at its highest level since March last week but may be likely to fall further in the coming days as tensions rise between the U.S. and China, key economic reports loom and the charts warn of a correction for both Sterling and the greenback.

Sterling was one of the worst performing majors last week after a strong run previously, although losses were fractional and came mostly in the final session of the week where better-than-expected American jobs data emerged alongside increased U.S.-China tensions.

Major currencies have advanced strongly against the Dollar in recent weeks so bore the brunt of investors' caution on Friday, though with the Dollar still not far off more-than two-year lows, there could be further downside for the Pound-to-Dollar rate if tensions rise further.

"Probably more dominant for the dollar will be two key issues: i) is there any progress on the Phase IV stimulus plan and ii) how does China retaliate to the latest sanctions from the White House...However, investors are really sinking their teeth into the negative US real yield story ahead of the 16 Sep FOMC meeting and we suspect that any corrective dollar rallies (even if they are violent) are short-lived," says Chris Turner, regional head of research at ING. "While acknowledging the market is short GBP and subject to a squeeze, we think there is outside risk of a Cable correction to the 1.2850 area, before it returns to challenge 1.32 on the weak dollar story."

The Pound-Dollar rate tumbled back toward 1.30 after the White House confirmed bans on some Chinese technology firms Friday, helping sour risk appetite, while China's threat of retaliation was parried by U.S. sanctions on 12 Chinese officials including Hong Kong chief executive Carrie Lam. The six-month review into January's 'phase one" phase deal is also expected this week and the risk is that the U.S. decides to terminate the accord and reimpose tariffs.

"We the Foreign Ministers of Australia, Canada, New Zealand, and the United Kingdom, and the United States Secretary of State are gravely concerned by the Hong Kong government’s unjust disqualification of candidates and disproportionate postponement of Legislative Council elections. These moves have undermined the democratic process that has been fundamental to Hong Kong’s stability and prosperity...We urge the Hong Kong government to hold the elections as soon as possible," reads a statement issued on Sunday by foreign ministers of the anglospheric 'Five Eyes' network.

Above: Pound-to-Dollar rate shown at daily intervals with Dollar Index (orange line, left axis).

New tariffs and further tensions will heap more pressure on the embattled global economy and could keep risk assets in retreat while lifting the Dollar.

Many analysts look for Sterling to trade lower toward 1.28 over the coming days, with any increases seen petering out below 1.32, as the oversold greenback enjoys a rebound and the Pound-to-Dollar rate charts warn of a correction.

"GBP/USD’s new high of 1.31856 has been accompanied by a 13 count and divergence of the daily RSI. It is facing tough resistance at the 1.3165 2015-2020 downtrend and the 1.3201 March 2020 high and the risk of a correction lower is now high. Dips lower are expected to find initial support at the 1.2814 June high ahead of 200 day ma at 1.2707 and remain contained by the 1.2588 support line," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

The back and forth between the world's two largest economies will be a key influence on demand for the greenback this week but so too will executive orders from President Donald Trump, who extended emergency aid support for American households, though at reduced levels after lawmakers were unable to reach a bipartisan agreement.

It's not clear if greater clarity on fiscal support will be enough to sustain a Dollar rebound, although a possible Turkish currency collapse would be supportive of the greenback and a threat to Sterling given its correlation with the Euro-to-Dollar rate is one of the primary conduits through which a tussle between Turkish authorities and the market would be played out. Beyond this, the U.S.-China spat and economic data will help dictate risk appetite.

Not all see the week as likely to go badly for Sterling however, as some including analysts those at Scotiabank and MUFG see declines in the Pound-to-Dollar rate being arrested at nearby levels ahead of a renewed push higher.

Above: Pound-to-Dollar rate shown at weekly intervals with Dollar Index (orange line, left axis).

"Next week will see a couple of key domestic data releases likely to set the tone for Cable in regard to recovery prospects with Jul employment out on Tuesday, followed by Q2 GDP on Wednesday which is estimated to have recorded around a 60% annualised contraction—steeper than all of its major continental peers," says Shaun Osborne, chief FX strategist at Scotiabank. "GBP looks to temporarily build a sideways trading range—after failing to test the 1.32 level."

Second quarter GDP data and unemployment numbers for June are out this week although Sterling might be more sensitive to upside surprises than disappointments given the extent to which bearish sentiments toward the UK economy have already weighed on the British currency in recent months.

"Among the EU’s big 4, Spain performed the worst dropping by 18% q-o-q. We think the UK will fare far worse. We expect growth to shrink by 22% q-o-q," says Sanjay Raja, an economist at Deutsche Bank. "The Q2 national accounts will paint one of the ugliest pictures of the UK economy ever."

Job numbers are out Tuesday at 07:00 while GDP data is due out at 0:700 Wednesday. Investors may pay more attention to the GDP data given how the government furlough scheme has kept the official unemployment rate suppressed. Consensus looks for the latter to rise from 3.9% to 4.2% for the month of June on Tuesday while favouring a -20.5% contraction that would put the UK at the bottom of the developed world league table.

"Unless there is a broader deterioration in overall investor risk sentiment, the GBP appears well placed to extend its advance in the near-term," says Lee Hardman, a currency analyst at MUFG. "If cable is able to break above the 1.3200 where the highs from earlier this year are located, it will open the door to a potential test of the December 2019 high at close to the 1.3500...we remain doubtful over the sustainability of a stronger GBP."