British GBP/USD Forecast: Gains to Extend say Analysts, Eyes on Article 50 Ruling
GBP has jumped to a 5-week best against the US Dollar at the start of the new week with GBP/USD being quoted at 1.2464 at the time of writing.
The strong start to the week for Pound Sterling reinforces our forecasts released over the weekend in which we predicted an extension of the pair's nascent recovery (see below).
The gain are an extension of those witnessed in the previous week where we had a pro-GBP speech from the UK Prime Minisiter being delivered on Tuesday and a USD-negative speech delivered by the new US President on Friday.
Trump's speech was protectionist and nationalistic in nature while being very thin on pro-USD substance, i.e details on his fiscal spending plans.
"Trump’s inauguration speech was hard-hitting and protectionist, but Trump dropped some the more pro-growth ideas on infrastructure with the result that the speech, failed to set financial markets alight,” says analyst Kathleen Brooks, of City Index.
“The Dollar and stocks did retreat during Trump’s inaugural address,” says Brooks.
"Dollar weakness is the driving force in the markets this morning as the greenback retreats after the first few days of Donald Trump in the White House. So far the new president has stoked protectionism but offered little detail on the good stuff – pro-growth infrastructure spending, stimulus etc. That’s ensuring the dollar starts the week on the back foot," says Neil Wilson, Senior Market Analyst at ETX Capital.
Research from Nordea Bank also suggests a strong correlation between Dollar weakness and inauguration which is likely to last until mid-March.
The empirical evidence is strong at over 90%.
Looking ahead, expect the Dollar to be politically driven.
"Markets will be on alert during the inaugural week of Trump's presidency, and high of the radar is trade policy, especially after commerce secretary Wilbur Ross underlined that the reopening of NAFTA is a top priority. A focus on rules of origin and dispute-settlement panels rather than punitive tariffs would be viewed positively, while greater detail on infrastructure spending and corporate tax reform plans would reinforce market sentiment as well," say TD Securities in a brief to clients.
Technical Forecasts: More Gains to Come
Sterling-Dollar’s big surge last Tuesday, following Theresa May’s Brexit speech led to a technical breakout above the descending channel on the daily chart.
The channel breakout is a significant indicator of strength and forecasts a move higher (labeled “y”) which is roughly the same length as the height of the channel (labeled “x”).
After the breakout, the pair has corrected back temporarily to support from the upper channel line, in a throwback move, before moving higher again – this is quite a common occurrence.
Directly above the 1.2415 super-Tuesday highs lies a tough resistance zone composed of the 50-day MA and the monthly pivot (PP).
This resistance zone is represented on the chart as a box with red hatching, and it is likely to pose a major obstacle to the exchange rate rising any higher.
Therefore, to be more certain that the bullish break will extend, we would ideally wish to see a break clearly above these levels, and above 1.2500, to a target at about 1.2600.
Other technical strategists are looking for a key resistance point to be broken before advocating for further gains.
"Aligned with broad USD weakness, GBPUSD has rallied strongly from 1.2250/45 support region. We are now testing important resistance around 1.2475, with a break here opening the potential for a stronger move towards next resistance in the 1.2575/1.2605 region," says Robin Wilkin with Lloyds Bank Commercial Banking.
Meanwhile, analyst Gary Hardcombe at UBS believes further GBP/USD strength lies ahead.
"Helped by some weakness in the Asia session, cable traded above the high from January 2017 and ran out of steam just ahead of 1.2450 for the time being. I think it's just a matter of time until this will trade higher and I look to buy dips towards this morning's lows around 1.2360-70, s/l 1.2300, target 1.2450," says Hardcombe in a brief to clients at the start of the new week.
It is worth noting however that the longer-term Dollar trend is certainly not be written off and at some stage the Greenback should reassert.
"The currency markets remain in a random two-way rotational phase and continue to correct against the primary trend, which continues to favour the dollar. The dollar index moved below the 50-day MA, but price remains well above its 200-day MA, and the trend is up. The RSI is flirting with bull market support at the 40 level," says Phil Seaton at LS Trader.
So while we allow for further weakness in the Dollar at this point, remember that it is still likely to push notably higher over 2017.
The Pound this Week
The Supreme Court Ruling on Article 50 will be released on Tuesday at 09:30 GMT.
Since Prime Minister May has already said she will be opening up Brexit to a parliamentary vote, the decision will only have a limited impact.
There is, however, a risk that the law lords could say the devolved parliaments of the other parts of the United Kingdom – Scotland, Wales and Northern Ireland - may also be allowed a vote, which could delay the whole Brexit process.
It is therefore possible that devolved parliaments might vote against triggering Article 50 as an expression of their opposition to Brexit.
“If the Scottish and Northern Irish devolved parliaments are entitled to vote on the matter, this could delay Brexit further. In addition, it is possible that local politicians could vote to reject the proposal on behalf of their constituents,” said Siobhan Fenton, writing for the Independent.
This will introduce a fresh layer of uncertainty for the UK and we believe it would actually be negative for the Pound which runs counter to the currency's reaction when the initial rulings on Article 50 were made by the High Court in 2016.
ING: Reaction Function of Sterling to High Court Ruling
Analyst Viraj Patel at ING has given his expectations for how the Pound could react to the High-Court ruling on Tuesday.
Scenario 1:
"Any ruling that doesn’t enable Parliament to have a say on the UK’s actual Brexit strategy during UK-EU negotiations will only lead to increased political uncertainty and probably renewed fears of a 'hard' Brexit. This will be unambiguously GBP negative and in this scenario our preferred strategy would be to fade any knee-jerk GBP move higher following tomorrow’s announcement. We would look for GBP/USD to move down to 1.2100 and EUR/GBP to move up to 0.8850 over the coming weeks."
Scenario 2:
"In the very unlikely event that the Supreme Court rules that Parliament must have greater scrutiny on the actual Brexit process over the next two years (after the triggering of Article 50), then we would view this as being modestly GBP positive. Although there is no real precedence for this, UK media are reporting that the Supreme Court could restrict the “prerogative powers” of the Government – thereby ensuring that Parliament either has a one-off vote or regular votes on Brexit-related decisions made by PM May.
"This would steer the probability of outcomes towards a softer Brexit (given opposition party reservations over exiting the single market). In the case of regular votes throughout the Brexit negotiations (as proposed by former Chancellor Ken Clarke), this would give Parliament the strongest say on the final Brexit outcome and we could see EUR/GBP move initially down to 0.8470 (GBP/USD squeeze higher to 1.2650)."
Data to Watch for the Pound
The big data release next week will be Q4 GDP revisions, out at 9.30 GMT, which is expected to show growth of 2.1% year-on-year (yoy) and 0.5% month-on-month (mom).
On the data front watch for Q4 GDP which is out on Thursday.
"Our economists are looking for 0.5%q/q, as a robust contribution from the service sector is expected once again. Survey indicators remain healthy, suggesting that some of that momentum is carrying in to 2017. Consensus is now looking for a shallower and longer hit to UK activity as a result of EU exit," says Ryan Djajasaputra at Investec.
Data for the Dollar
The Dollar’s most important release is on Friday, January 27 with fourth quarter GDP out at 08.30, which is forecast to rise 2.2% from 3.5% previously.
It will the Q4's advance estimate – the first out of three – in Q3 GDP was 3.5%, which was a big improvement.
The US consumer was the big driving force. Exports rose 10%.
"Don’t expect Q4 to be as strong but overall we expect growth to be 1.6% in 2016," said BBVA's Amanda Augustine.
The Dollar’s week starts with Existing Home Sales in December, on Tuesday, January 24 at 10.00 GMT. It is expected to rise by 5.54m, from 5.61m previously.
Also of importance is the release of the preliminary reading for Manufacturing PMI in January, out at 9.45 GMT, which is forecast to show a rise of one basis point to 54.4 from 54.3 previously.
New Home Sales in December, out at 10.00, on Thursday, January 26 are forecast to rise by 584k from 592k previously.
This represents a -1.0% fall from the previous result.
Core Durable Goods Orders month-on-month in December are forecast to rise by 0.5% from 0.6% previously. These are also out at 8.30.
