GBP/USD 5-Day Outlook: GBP/USD at Critical Inflection Point
The British Pound starts the new week in familiar territory against the US Dollar being quoted at 1.2567, it closed the previous week at 1.2547.
Pound Sterling has risen against the US Dollar for two weeks in a row now having recovered from support at the key 1.20 area reached earler this month.
The rally higher has however met some selling pressure in the approach to 1.26 and the latter half of the week ending January 27 saw the exchange rate retreat.
Regarding the outlook, our studies indicate GBP/USD has reached a critical inflection point where a resumption of the short-term trend higher is favoured, but there is also a lesser possibility of a break lower.
On the daily chart, last Wednesday’s strong up day was followed by two red down days on Thursday and Friday and this configuration signifies a higher than average probability of 66% that the next day – this Monday - will be an up day.
The fact the previous three days (last Monday, Tuesday, and Wednesday) also constituted a high probability bullish continuation pattern further enhances the chances of a continuation higher, extending the short-term uptrend.
The four-hour chart below is showing an a-b-c correction which looks complete and therefore aurgurs a resumption of the uptrend, emphasizing the bullish expectations from the daily chart.
If the exchange rate breaks above the ‘b’ wave highs at 1.2612 that would provide confirmation of a move higher, with an initial target at the 1.2673 highs, just below the R1 monthly pivot at 1.2682.
Alternatively, a break below the ‘c’ wave lows at 1.2518 would indicate a reversal of peaks and troughs lower and probably lead to a decline to a target at support at 1.2450.
Analyst Karen Jones at Commerzbank is meanwhile negative on Sterling's prospects against the Dollar over the 1-3 week timeframe.
She says that until such as time as GBP/USD can go back above 1.35 the exchange rate will remain under pressure.
"GBP/USD last week we charted a TD perfected set up on the daily chart and the near term risk is that we will see a deeper sell off," says Jones in a note to clients seen by Pound Sterling Live.
Dips lower are however expected indicated to hold support circa 1.2420/1.2340.
Watch US Pending Home Sales on Monday
The 66% probability that Monday will end higher than it started, noted above could find its driver in the form of US Pending Home Sales at 15.00 GMT on Monday.
Jitters about the US housing market persist and a shock fall in sales could be just the catalyst required to send the Dollar lower and GBP/USD higher fulfilling the technical prediction from the charts.
Other data out on Monday includes US Personal Consumption Expenditure (PCE) out at 13.30, which heavily influences the outlook for both inflation and growth and is the favoured inflation gauge of the Federal Reserve. Clearly an upset in the PCE will weigh heavily on the Dollar as it could impact on the Fed’s decision to hike rates.
Clearly, an upset in the PCE will weigh heavily on the Dollar as it could impact on the Fed’s decision to hike rates.
There is a risk of a below-par PCE outcome given the below forecast Q4 GDP data out last week.
The Federal Open Market Committee (FOMC)
The biggest event for the Dollar in the week ahead, however, will come in the form of the FOMC decision due on Wednesday.
Since there will be no press conference after the event and the committee are not expected to vote for higher interest rates just yet, the focus will be on the wording of the accompanying statement.
“Investors will be reviewing the statement closely to ensure that the Fed is committed to raising interest rates 3 times this year. Of course, they won’t be that specific but an unambiguously hawkish tone could drive USD/JPY to 116 whereas divided views and new concerns could sink it back to the 113 handle,” said Kathy Lien, Director of BK Asset Management.
Non-Farm Payrolls on Friday (13.30) also deserve a mention.
Payrolls are expected to come out at 171k from 156k in the previous week and the Unemployment Rate is forecast to remain fixed at 4.7%.
Clearly, a stronger-than-expected result would be bullish for the Dollar and vice-versa as expectations for three rate rises in 2017 will be cemented.
Super-Thursday at the Bank of England
Sterling will come front and centre on Thursday when the Bank of England (BOE) have their rate meeting, which will be followed by the meeting minutes.
We have noted here that Sterling could retain a soft bias despite heightened chances that the Bank will be leaning towards raising interest rates in coming months.
The release of the Quarterly Inflation Report at the same time is also expected to impact on the Pound.
“We like buying pounds into the Quarterly Inflation Report, especially as it dips toward 1.25 with a target of 1.27/1.28,” says BK Asset Management’s Lien.
Nevertheless, these comments are not necessarily representative of a consensus view, as illustrated by ING's Viraj Patel:
“It's strange to see GBP performing so well when the path towards a 'hard' Brexit remains firmly on the table; strategically, we remain bearish on GBP/USD and look for fresh catalysts (namely dollar strength) to see a short-term move back towards the 1.24 level.”
BOE Has More Options
Continued growth and low unemployment mean that the BOE has room to ‘manoeuvre’ in combatting inflation because they can put up interest rates, argues Scott Bowman from advisory service Capital Economics.
This would be a positive development for Sterling's outlook as higher rates are likely to attract inflows of foreign capital as global investors seek out yield on their investments.
This stands in contrast to the previously bleaker view of rising inflation due to the weak Pound, and low growth.
Markets are pricing in a 50% chance of a rate hike by year-end.
“Growth and inflation have been stronger than expected and while Carney may be concerned about the negative impact of Brexit on the economy in the years ahead, the reality is that business activity and sentiment has been improving,” adds Lien.
