Pound to Dollar Week Ahead Forecast: Looking for Signs of Exhaustion

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The British Pound can continue to advance against the Dollar in the coming weeks, but the next few days could see some consolidation around current levels.

The Pound to Dollar exchange rate (GBP/USD) rose 1.50% last week, peaking at 1.3339, but is back at 1.3318 at the time of writing. The weekly chart's RSI is now touching overbought conditions at 70, and we note that the RSI rarely sustains itself here.

We forecast a pullback below 1.33 at some point this week as the market is liable to rebalance itself following the strong gains of late. To be sure, the medium-term uptrend remains firmly intact, but some consolidation is called for.

"The next resistance at 1.3350 is unlikely to come under threat," says a note from UOB. "Upward momentum has not increased much, and GBP is unlikely to rise further. Today, GBP is more likely to trade in a range, probably between 1.3270 and 1.3340."

The first risk event for the Pound to navigate comes later on Monday in the form of the September PMI survey, which will tell us how the economic expansion is faring.

The UK PMI is released at 09:30, and we see some risks of a below-consensus reading in line with other surveys showing an increase in nervousness amongst businesses and consumers ahead of next month's budget announcement from the new government.

Above: GBP/USD at weekly intervals, showing the overbought conditions on the RSI in the lower panel.

A soft data print can give traders a reason to book profit on an impressive rally. Note, too, that positioning for the Pound Sterling upside is heavily subscribed, with the trading community holding significant 'long' positions.

We can't predict the future based on positioning alone, but it should serve as a reminder that when disappointment eventually comes, the market reaction could be notable.

For now the broader backdrop is supportive of Pound Sterling and GBP/USD can gain as long as global equity markets are rising. For this reason, we think global factors will remain more important to Sterling than domestic matters.

Last week's Federal Reserve's 50 basis point rate cut has boosted investor sentiment and helped global markets increase in value and the prospect of further rate cuts could offer further gains.

"While we do not expect the FOMC to cut the Funds rate as much as the market predicts, the USD is likely to fall while volatility is low and risk appetite is high. FOMC chair Powell and Vice chair Williams speak on Thursday. We expect neither to push back against the positive market reaction to the outsized 50bp interest rate cut," says Kristina Clifton, a foreign exchange analyst at Commonwealth Bank.

Clifton says GBP/USD can maintain its trend higher this week if financial market volatility remains low and advanced economy equity markets remain in the green.

Turning to U.S.-based risks, this week’s most notable U.S. will be Friday’s core PCE figures, which is the Fed’s preferred inflation gauge.

Markets look for inflation to have risen 0.1pp to 2.7% year-on-year in August. Rising inflation is at odds with generous expectations for Fed rate cuts, and should the market sober up somewhat, the Dollar can recover.

Keep an eye on the various Federal Reserve policymakers who are due to give speeches this week. Any sounds of caution regarding the pace of future cuts can give the market reason to rebalance lower from last week's euphoria.

"Fedspeak returns with a vengeance this week, as a whole host of policymakers make remarks now that the ‘blackout’ period has concluded. Thursday’s comments from Chair Powell, dissenter Bowman, and NY Fed President Williams will be of most interest to participants," says Michael Brown, an analyst with Pepperstone.