Pound-Dollar Week Ahead Forecast: Resisting Gravity

-GBP/USD at midpoint of two-month range after Friday sell-off.
-But bullish technical outlook, rising Brexit hopes offer support.
-Charts, Brexit developments point to 1.35, but risks still linger.
-Upside bias intact above 1.2891 as key support seen at 1.27.

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• GBP/USD spot rate at time of writing: 1.3028
• Bank transfer rate (indicative guide): 1.2686-1.2777
• FX specialist providers (indicative guide): 1.2846-1.2925
• More information on FX specialist rates here

The British Pound softened on the final day of the last week but is being tipped by analysts to resist further gravity over the coming day given nearby technical support levels, a bullish setup on the charts and seemingly improved odds of a Brexit trade deal, although the Dollar outlook itself is a bit of a wild card. 

Pound Sterling had been the best performing major currency of the week until it came undone on Friday, suffering heavy losses against all major counterparts despite reports suggesting a French compromise could be near on fisheries and an optimistic tone from a government minister in London. 

However, the Dollar was comfortably the worst performing major currency for the period as investors appeared to price out any prospect of a victory by President Donald Trump in the Tuesday, 03 November presidential election which has ultimately underpinned GBP/USD.

U.S. assets were sold widely following what was billed in the markets as President Trump's last chance to shift opinion polls in his favour ahead of the ballot, with the two having participated in a second televised election debate.

“There was a sense last week, with the dollar selling off across the board, that investors had already concluded that Joe Biden would win the November 3 election and were already positioning for the expected dollar decline in 2021. Polls do still give Biden a commanding lead, but in the week ahead the Trump team will be hoping that what should be a huge 35% (QoQ annualised) bounce back in 3Q20 GDP on Friday should remind voters of the White House’s growth credentials,” says Chris Turner, global head of markets and regional head of research at ING. “We’re neutral to slightly negative on the dollar this week and believe investors can weather news that a US stimulus bill may not be forthcoming ahead of the election.”

Above: Dollar Index shown at hourly intervals alongside Pound-to-Dollar rate (black line, left axis) Set a floor.  If you are worried the market will move against you, set a minimum rate you are willing to accept for your international payments, learn more here.

Dollar declines could endure this week if investors continue wager on a Democratic Party victory and are happy to look past the diminishing prospect of another financial support package for households emerging from Washington ahead of the vote. 

However, Thursday’s third-quarter GDP numbers from the U.S. and European Central Bank (ECB) monetary policy decision could offer the greenback salvation ahead of next weekend if economists are right about the prospect of a strong performance from the world’s largest economy and if the ECB sets out to push the Euro-to-Dollar rate lower. 

“Having recently broken through a near term downtrend an upside bias is maintained above the near term uptrend at 1.2891,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who’s a buyer of Sterling. “The market is capable of retesting the 1.3201 March high and the recent high at 1.3483. In this vicinity is the 1.3468 multiyear downtrend and if seen we would allow this to again hold.”

Jones is targeting a move up to 1.3450 after having bought the Pound at 1.3085 and again at 1.3130, but intends to reduce position around 1.32.

Above: GBP/USD at daily intervals with Fibonacci retracements (supports) of March fall & selected moving-averages. Book your ideal rate automatically when it is reached, find out more find out more.

“There is nothing of relevance on the national calendar next week for the GBP with movement around trade talks set to act as the main influence,” says Shaun Osborne, chief FX strategist at Scotiabank. “Firmer support comes in at the big figure—reinforced (roughly) by its 50-day MA at 1.3015. The GBP is still clearly holding on to its upward trajectory since the final week of Sep but it must first break past the 61.8% Fib retracement of its Sep decline at 1.3174 (where its ascent stopped on Wednesday) before it can aim for a clear continuation of its gains.” 

Pound Sterling fell against the Dollar on Friday, even as the greenback retreated from other currencies and has now slipped below the midpoint of a two-month range spanning the gap between 1.2692 and 1.3450, despite a clear improvement in the odds of a Brexit trade deal being reached. 

The Pound-to-Dollar rate had fallen heavily from around 1.3450 early in September when the perceived odds of a ‘no deal’ Brexit rose sharply in response to the Internal Market Bill, declining below 1.27 before recovering from late September and throughout October. 

Brexit risks may have shifted enough for there to now be at least a 50/50 chance of a deal being struck by the deadline of mid-November, which might mean Sterling is misplaced in the lower half of its recent range, especially if the Dollar is to remain on its back foot. 

“There are a growing list of negatives for the outlook, including the rise in virus cases in Europe and lockdowns in UK regions, but the market has so far shrugged them off,” says Jordan Rochester, a strategist at Nomura. “We still expect a deal to perhaps provide a “buy the rumour, sell the fact moment” and GBP to underperform in the medium term . But we believe now is the time to buy into the potential for a last-minute deal before mid-November and with it we expect a higher GBP in the short term at least.”

Above: GBP/USD at weekly intervals with Fibonacci retracements (supports) of 2015 fall, selected moving-averages. Secure today's rate for use over coming months, thereby protecting your international payments budget, find out more.

Rochester and the Nomura team advocated to clients last week that they use options to bet that the Pound-to-Dollar rate rises as far as 1.35 in the next month, after both sides said trade negotiations would resume following the brief hiatus at the instigation of Prime Minister Boris Johnson, delivering a boost to Sterling in the process.

The Pound was further heartened by a suggestion from Michel Barnier that fisheries remains the only area of significant disagreement. Trade minister Liz Truss was also quoted saying "we've made real progress" and that a deal can be done, echoing the government line as both celebrated the signing of an adapted EU trade agreement with Japan. Intensive talks are set to continue in London this week. 

“Both sides have acknowledged the need for compromise and hence the backdrop is a little more favourable. Given we also have less conviction in USD strength, the potential scope to the downside may appear less. However, we will hold on to this trade simply given the broad macro backdrop for the pound remains grim in our view,” says Lee Hardman, a currency analyst at MUFG, who’s a seller of the Pound-to-Dollar rate. “Our argument for this trade was increased concerns on a deal being reached. We still have that brinkmanship ahead of us and if a deal is done it will be in the final hours and we are still likely to get fears increasing over no deal.”

The calendar is devoid of market-moving economic numbers for Sterling this week, but U.S. GDP data will be scrutinised closely at 12:30 London time on Thursday, just ahead of the ECB meeting for October. 

Above: Euro-to-Dollar rate shown at hourly intervals alongside Pound-to-Dollar rate (black line, left axis)

Consensus is looking for GDP to have risen at a quarter-on-quarter pace of 32% in the three months to the end of September, reversing much of the -31.4% contraction seen in the prior period.

“We expect GDP to rebound at an annualized rate of 32.5% in the third quarter, versus a Bloomberg median estimate of 32.0%,” says Kevin Cummins, a senior U.S. economist at Natwest Markets. “If our Q3 real GDP estimate is realized, the level of GDP would still be 3.6% below the Q4(19) level prior to the pandemic. In fact, we don’t have the level of GDP surpassing the pre-COVID level until Q4(21); and closing the output gap will take even more time.”

A strong GDP report combined with an ECB complaint about Euro strength, could be enough to push the Euro-to-Dollar rate lower and the Dollar Index higher on Thursday, which might then act as a last minute headwind for the Pound-to-Dollar rate given its positive correlation with the single currency.

Beyond GDP, the ECB and Brexit, coronavirus developments could come in for scrutiny given second waves of infection are threatening to bring about a final quarter economic contraction in the UK and Europe. 

“The upward trend in confirmed U.S. cases continues, thanks mostly to an increasing test positivity rate...The daily number of third wave cases is on track to exceed the second wave peak, and therefore hit a record high,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics. “U.K. cases are rising less quickly than in most of continental Europe, and the rate of increase has slowed marginally as the results of large-scale testing of college students has dropped out of the numbers.”

Above: Overview of UK Government's digital coronavirus dashboard.