Forecast for the Pound / Dollar Rate in the Coming Week
GBP/USD has broken out of its previous range and run up to the 1.2950s following Theresa May’s calling of a snap general election in June.
The election is expected to shore up support for an ‘improved’ Brexit deal by giving her a bigger majority so she is less vulnerable to manipulation by a minority clique of Eurosceptic MPs.
Our studies suggest the push higher is nearing its initial target, based on technical measures at 1.3156, and has just pierced a major resistance level at the R2 monthly pivot at 1.2933.
We expect it to slog higher and reach the 1.31s although the ‘meat’ of the rally is over and momentum will probably tail off from here.
The pair has been forming a large triangle pattern since the recovery from the October lows and our target is calculated by extrapolating the height of the triangle at its widest part multiplied by 0.618 from the breakout point.
The 0.618 is an important mathematical ratio called the Golden Mean which governs structures in nature, such as the whorl of sea snail shells, the number of seeds in a sunflower, births in rabbit breeding, and arguably finance too.
The MACD momentum indicator is not looking very bullish, but the market may push higher and set up a divergence towards the latter stages of the rally.
Data for the Dollar in the Coming Week
The Dollar’s main events in the coming week are the FOMC (Federal Open Market Committee) meeting on Wednesday evening at 19.00 GMT and Non-Farm Payrolls at 13.30 on Friday.
Recent poor GDP data for Q1 and a low (98k) Payrolls result in March have brought into question the sustainability of US growth.
If the Federal Reserve appear less confident in their language this could weigh on the Dollar.
Expectations had been for the Fed to announce an increase in interest rates at the June meeting, however, the recent poor data has now brought that into doubt, at least according to some analysts.
“There is currently a misalignment between the performance of the US economy and the markets expectations for Fed tightening,” said Kathy Lien of BK Asset Management.
The risk is, therefore, for the FOMC to realign market expectations to a less hawkish outlook, which would result in a weakening of the Dollar.
Not all analysts are on the same page with this, however, as Barclays Capital are more optimistic, arguing the Q1 GDP miss was more due to “transitory” “seasonal” effects than real economic decline.
“The bias is for action, not inaction, which means we believe the hurdle for weak data to alter the Fed’s plans has been raised,” said Barcap’s Antonio Garcia Pascual, who also highlights the possibility of a change in the Fed’s language over reinvestment of its QE proceeds.
As far as Payrolls go, the market and most analysts are optimistic April will show a better result than March.
Consensus estimates are for 193k; TD Securities expect 165k and Barcap forecast 225k.
Data for the Pound in the Coming Week
A new month means fresh data in the form of the trio of UK Purchasing Manager Surveys (PMI) for Manufacturing, Services and Construction.
These are the most timely economic data releases available and will give us a view of how the UK economy performed in April.
Both Manufacturing, on Tuesday at 9.30 GMT, and Construction, out on Wednesday at the same time, are forecast to fall by two basis points to 54.0 and 52.0 respectively.
Services, out on Thursday at 9.30, is expected to fall more steeply to 54.5 from 55.0 previously.
The recent downturn in UK economic activity means markets will be watching whether the trend continues with PMIs.
“Markets are looking for a bit of a pull-back in the PMI’s, and we’re just modestly more optimistic on balance,” said TD Securities in a review of the week ahead.
We doubt that disappointment will feed into any sustained pressure on Sterling though as the currency appears to be more concerned with global investor dynamics and domestic politics at present.
