British GBP/USD X-Rate: Forecast for Coming Week, Uptrend Intact
Pound Sterling has been rising steadily versus the Dollar and although the exchange rate did drop quite sharply on Friday, the outlook remains broadly bullish in the short-term.
Concerning the outlook, we would wish to see confirmation from a move above Thursday’s highs at 1.2532 before forecasting more upside for the British Pound.
Our studies suggest such a move higher would probably continue and reach the 1.2600 level just below the trendline connecting the December 2016 and February 2017 highs.
Whilst further weakness is possible given the likely triggering of Article 50 in the coming week, there are insufficient bearish signs yet to evidence a higher probability of downside.
We also note the steep rise in the MACD momentum indicator in the lower pane to above the zero-line - a signal that the pair now is in an up-trend.
Data, Events to Watch for the Dollar
US data has been strong in recent weeks, with Durable Goods Orders showing robust gains, New Home Sales rising by 6.1% and the Current Account deficit shrinking – all positives for the Dollar going forward.
In the week ahead, however, all eyes will be trained on Personal Consumption Expenditure (PCE), out on Friday, March 31 at 12.30 GMT because it has a material impact on Federal Reserve Policy.
Investors were disappointed after the Fed March meeting and sold the Dollar, because Fed members continued to show distrust at the economic recovery, and seemed unlikely to raise interest rates at their June meeting.
If Core PCE rises above its 1.7% February result (yearly) or beats expectations of a 0.2% month-on-month gain, however, this will increase expectations of a June interest rate rise and bolster the Dollar.
Higher interest rates are supportive of a currency as they attract more inflows of foreign capital seeking yield.
TD Securities expect Headline PCE to rise above 2.0% signalling steeper rises in inflation and more gains, potentially, for the Dollar.
The other main data highlight for the Dollar ia Michigan Sentiment in March, put at 14.00 on Friday, which is forecast to remain at 97.6, and Expectations which are expected to rise to 87.0 from 86.7 in the previous month.
Data, Events to Watch for the Pound this Week
Theresa May’s triggering of Article 50 is likely to be the main event in the coming week; and Wednesday 29 is a likely date.
“We expect GBP/USD to fall quickly when the announcement is made but it should recover swiftly when the inevitable happens and investors finally realise the negotiation process will be long and filled with delay,” says Kathy Lien, managing director at BK Asset Management.
Why Sterling would fall after the event is perplexing in our view - it is clearly well signposted and there is unlikely to be any new information on the outlook.
Any potential drivers for Sterling will come in the succession of events following the triggering of Article 50 - for instance, the Europeans laying out their proposed negotiating timetable. But event here we see little of substance to bother the Pound. It is only when negotiations get underway in earnest will Sterling move.
Analysts at Barclays meanwhile reckon that the triggering of Article 50 could potentially align with a longer-term recovery they expect Pound Sterling to undertake.
“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.
Expect the European Commission to slap a divorce bill on Britain in the early stages of this whole process. The Commission wants the UK to pay for all its outstanding spending commitments until 2020, which amounts to a bill of 50-60 billion Euros. Needless to say the UK does not agree with the figure.
Why would it the UK pay for a club it is no longer part of? Yes, these spending committments have been made, but they were made under the assumption that the UK would benefit from single market it is helping maintain via spending committments.
The EU wants this issue dealt with ahead of trade negotiations which suggests they don't want the UK to use the bill as a negotiating chip. Understandably, the UK wants the bill and negotiations to run concurrently.
We expect the tug-of-war over these various issues to potentially inject volatility into Sterling markets, but don't see any fundamental shift in direction resulting.
It is the trade negotiations that will be of utmost importance and these will only likely be tackled towards the end of 2017.
On the data front, it is a quiet week.
GDP data is out at 08.30 GMT on Friday March 31 but it is just a third and final revision and therefore highly unlikely to surprise. Growth for the final quarter 2016 is forecast to remain at the 0.7% announced by the ONS previously.
Mortgage Approvals, also out on Friday are not forecast to move much and thus seem unlikely to have much impact on the market.