Pound-Dollar Week Ahead Forecast: Bulls Eye Multi-year Highs on Brexit and Vaccine Developments

- GBP/USD support between 1.32 & 1.33
- Brexit deal offers scope for 1.40.
- Vaccine progress supports risk & GBP
- But USD verging on oversold.
- Renewed 'lockdown' in parts of U.S. could crimp GBP/USD's rally.

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• GBP/USD spot rate at time of writing: 1.3347
• Bank transfer rate (indicative guide): 1.2941-1.3050
• FX specialist providers (indicative guide): 1.3101-1.3181
• More information on FX specialist rates here

A high-flying Pound-to-Dollar exchange rate had its wings clipped last week after investors were spooked by rhetoric around Brexit negotiators, but it could yet clock multi-year highs over the coming days as the EU and UK edge toward a post-Brexit trade agreement.

Sterling was the second-worst performing major currency for the week by Friday's close after Prime Minister Boris Johnson and others spoke of "important differences" between the two sides in the Brexit negotiations, which tempered earlier optimism that a deal could soon be reached. 

But recent indications are all that remains to be determined are the terms of an agreement on fisheries access, which was the main focus of both the Prime Minister's recent statements as well as comments made by Foreign Minister Dominic Raab in an interview with Sky News on Sunday. 

"Let us work, let us work," the EU's negotiator Michel Barnier was quoted as saying on Sunday. 

The focus on fisheries could indicate that thornier issues such as the so-called 'level playing' field terms on state aid, the environment, taxes and other matters have been resolved, although neither a European climbdown nor British capitulation has been reported by the political press.

"It’s crunch time for GBP," says Mark Wilson, chief market analyst at Markets.com. "The exact timing of any announcement is still a question, but GBP support thus far indicates the market has a positive view – big downside risks if it’s no deal. Upside to 1.40 perhaps on a comprehensive trade deal."

Above: Pound Sterling's performance against major rivals in five years to Nov 2020. Source: Pound Sterling Live.

Pound Sterling has traded lower since the 2016 EU referendum and remains 11% lower against the Dollar than its November 2015 level. 

The Pound-to-Dollar exchange rate also remains beneath its December 2019 high around 1.35 at the opening of the new week, despite other comparable currencies like the Euro and the commodity Dollars of Australia, Canada and New Zealand all having scored multi-year highs against an unravelling greenback in 2020. 

The ever-present, though marginal, risk of a 'no deal' Brexit from the transition period at year-end is one of the factors to have kept the Pound from attaining 2018 highs in line with those of other currencies, so Sterling might have scope for a substantial rally in the event that a deal is announced this week or next.

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"We stay biased higher for a challenge on long -term resistance at 1.3472/1.3514," says David Sneddon, head of technical anlaysis at Credit Suisse. "Whilst a fresh rejection from here should be allowed for, we continue to look for an eventual break to see a major base secured, clearing the way for a move above 1.4300. Near-term support moves to 1.3330, then 1.3293, with 1.3270/64 ideally still holding to keep the immediate risk higher."

The two sides have less than a fortnight until the Thursday 11 December and the European Council meeting of 2020 that's thought to mark the last opportunity to have any agreement signed off in time for it to be ratified by year-end. Without one, both will default to doing business on World Trade Organization (WTO) terms from January 01, 2021, which would entail the reintroduction of tariffs on imports from the other side, in addition to the other non-tariff barriers that may materialise with or without a deal. 

Above: Pound-to-Dollar rate shown at weekly intervals with 200-week moving-average in pink, U.S. Dollar Index in black. 

With Brexit negotiations aside, Pound Sterling could take comfort early in the new week from a weekend Ft report suggesting the Pfizer and BioNTech coronavirus vaccine could be rolled out in the UK as soon as December 07, offering a glimmer of light at the end of the winter-long 'lockdown' tunnel. 

A vaccine rollout may reduce the government's compulsion to keep parts of the economy under lock and key, which may be welcomed by the Pound given that last week the government extended a range of draconian restrictions that now threaten to disrupt the hospitality sector for the duration of winter. 

Vaccine progress has lifted risky currencies and weighed on safe-havens like the Dollar and Yen for weeks, so is a positive omen for the Pound although much about price action in the coming days will be determined by how investors respond to the creeping spread of restrictions in the U.S.

"Focus this week will be whether US state governors, now that Thanksgiving has passed, choose to impose harsher lockdowns to curb second waves. While more lockdown restrictions may stand to curb US equity markets, the prospect of the Fed being prepared to add more liquidity should limit any dollar upside," says Chris Turner, global head of markets and regional head of research at ING, who forecasts a Pound-Dollar rate of 1.36 at year-end and 1.42 by end- 2021. 

Now the election and Thanksgiving holiday out of the way, U.S. cities and states have begun imposing fresh restrictions that threaten to further derail an economic recovery that was already dealt a setback when Washington lawmakers failed repeatedly in recent months to provide financial support to encumbered businesses and households.

Los Angeles County announced new restrictions on Friday that will see residents asked to "stay home as much as possible" from Monday while San Francisco imposed fresh curbs on acitivity for businesses in the hospitality trade as well as a nightime curfew, according to The Wall Street Journal. Meanwhile, the Center for Disease Control and Prevention (CDC) estimated that as many as 15% of Americans have already had the virus. 

With currencies like the Euro at highs not seen since 2018 and the Dollar Index verging on oversold territory, the big risk this week is of a Dollar rebound that could scupper any pre-Brexit deal recovery attempt by the Pound-to-Dollar rate and possibly even crimp any Brexit rally. 

Above: U.S. Dollar Index at weekly intervals with Fibonacci retracements of 2018 recovery, and relative strength index (RSI) measure of momentum shown in lower pane. RSI shows USD nearing oversold territory.

"The US still shows strong economic momentum, but with rising daily infections – at a time when Europe’s wave has peaked – its growth could slow sharply in Q1," says Christian Keller, head of economic research at Barclays. "We project that after a few tough winter months ahead, vaccination strategies should allow for a robust economic recovery next year from Q2 onwards." 

Any investor concerns about new restrictions could be maginified, potentially weighing on stock markets and offering support to the Dollar, if this week's Institute for Supply Management (ISM) PMI surveys and monthly non-farm payrolls report disappoint for the month of November. Consensus is looking for the ISM Manufacturing PMI to fall from 59.3 to 57.7 when it's released at 15:00 on Tuesday and for Thursday's Services PMI to fall from 56.6 to 56.0. 

Meanwhile, the U.S. job market is expected to have added, or simply recovered from the coronavirus around 500k jobs in November, which is expected to push the unemployment rate down from 6.9% to 6.8%. Payrolls figures are due for release on Friday at 13:30. There are no major data expected from the UK. 

Bad U.S. economic numbers could disrupt stock markets and lift the safe-haven Dollar in the short-term but might then be found weighing on the currency soon after, given that they would enhance the imperative for the Federal Reserve (Fed) to take action, making it more likely the bank targets long-term U.S. government bond yields using its quantitative easing programme from December. This would further reduce the attractiveness to investors of U.S. bonds assets, eating away a key source of Dollar demand.

For this reason, investors will listen closely to a Wednesday appearance of Fed Chair Jerome Powell before the House Financial Services Committee at 15:00, where he's expected to answer questions about the CARES Act, for clues on how the bank might respond to the above headwinds in its December 16 monetary policy decision.

"Our economists now expect the Fed to increase the weighted average maturity of its Treasury purchases at the December meeting. This should help keep longer-term Treasury yields contained over the near-term, supporting our USD short recommendations," says Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs, who forecasts a Pound-Dollar rate of 1.34 in three months, rising to 1.44 by the end of 2021.