GBP/USD: Outlook for this Week

Modified: Monday, 13 February 2017 12:40 GMT

Pound Sterling continues to trade in familiar territory against the US Dollar with the strength noted earlier in 2017 giving way a tighter, directionless consolidation around the 1.25 area that is showing little sign of giving way.

More broadly, the GBP/USD pair is oscillating within a range between 1.2000 and 1.2800.

The pair is currently trading in the middle of that range in the 1.26s which makes calling the outlook particularly difficult as there is no trend to get behind.

Tough resistance lies at the range highs at 1.2770 followed by 1.2835.

Steadily rising momentum, despite the sideways movement of the exchange rate, suggests an upside break is more likely than a break lower.

A break above 1.2900, however, would provide confirmation of more upside to an initial target of 1.3000, where the 200-day MA, provides a strong barrier to further appreciation.

USD Strength to Come, as Trump’s Fiscal Policy Comes back into Focus

The USD has traded on a firmer tone after US President Donald Trump mentioned that he would make corporate tax announcement over the next two to three weeks.

Since the start of the year, the USD gave back some ground amid concerns of the Trump’s administration’s ability to implement aggressive fiscal spending plans.

“As expansionary fiscal policies come back in focus, they will leverage the existing acceleration of US growth even if, as we expect, only a third of the planned programme is implemented,” say analysts at BNP Paribas pointing to a pro-growth outlook under Trump.

Markets have been also focused lately on potential trade policies such as the implementation of a border adjustment tax, which analysts argue could raise the long-term equilibrium (FEER) value of the USD.

“We maintain our view that risk reward for USD longs has improved considerably,” say BNP Paribas.

BNP Paribas Positioning Analysis indicates that the market is currently short USD, down from +22 in the beginning of this year. Therefore, there is a lot of room for new long positions to be added.

Data this Week

Factory Gate Price Inflation data released at 13.30 GMT on Tuesday, February 14, is expected to show a rise of 0.3% in January compared to the 0.2% previous result.

Federal Reserve Chair Janet Yellen is set to testify to Congress on Tuesday 15.00 and then at the same time on Wednesday.

Her comments will be analysed for clues as to when the Federal Reserve are likely to increase interest rates.

But there is a risk that recent lacklustre earning’s data may lead Yellen to backtrack ever so slightly on raising rates, in which case the Dollar will pull-back.

Other data includes Core CPI for January at 13.30 on Wednesday, with a 0.2% rise expected, and Retail Sales released at the same time and expected to rise by 0.1% from a previous 0.6%, and Core expected to increase by 0.4% from a previous 0.2%.

Thursday sees the release of Building Permits at 13.30 which is forecast to rise to 1.230m and the Philadelphia Fed Manufacturing Index, forecast to 18.0 in February from 23.6 previously.

Data, Events this week for the Pound

Inflation data for January is out at 9.30 on Tuesday, February 12, with analysts estimating a rise of 1.9% from the previous 1.6%.

The Bank of England will only raise interest rates should inflation be seen to be rising faster than they expected, and if markets see the prospect of higher interest rates on the horizon they will start bidding the Pound higher.

However, a rise in inflation is forecast due to the impact of the weaker Pound which has increased the cost of imports.

However, inflation is rising across the world at present as oil prices recover from record lows.

Therefore the Bank of England will look through any rise in inflation should they be due to these factors.

That is why markets will be watching instead is the core inflation rate - that element of the inflation picture that is due to economic growth, and wage rises in particular.

Therefore, what markets will instead be looking at is the core headline figure which is forecast to rise by 1.8% year-on-year in January, up from 1.6% in December.

Should the core level rise faster than expected then markets might take a bet that the Bank will be looking to raise interest rates sooner than they indicated in their February Inflation Report.

We heard last week that outgoing MPC member Kristin Forbes believes that an interest rate is actually warranted owing to the resillience of the UK economy.

If inflation beats expectations then perhaps other members of the MPC will share Forbes' view.

With wage data being so important then, expect market focus to turn to jobs and earnings data due out on Wednesday.

Average earnings will be in focus with 2.8% growth in wages being forecast. If this beats expectation then Sterling could be bid higher.

Watch for the unemployment rate to stay unchanged at 4.8%.

The Bank of England believes the economy's full employment threshold lies at 4.5%, the sooner this level is reached the sooner rates will likely rise.

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