5-Day Outlook for Pound v Dollar: Tentatively Favouring USD
With a huge strain being placed on Pound Sterling from Labour’s recovery in the polls of late, the outlook tentatively favours the Dollar, especially at the beginning of the week.
At the time of writing the GBP/USD exchange rate is quoted at 1.2877, down 0.11% on the day's opening level.
"FX traders have brushed off yet another terror attack on the UK and GBP/USD is trading above 1.2850, and it is in the middle of its most recent range between 1.3015 on the upside, and 1.2769 on the downside," says Kathleen Brooks, an analyst with City Index in London.
From a technical perspective, the chart is showing a convincing topping pattern which signifies Dollar strength and/or Pound weakness:
Although the exchange rate unexpectedly failed to break lower last week, and recovered after an initial trendline break on the previous Friday, we expect another more successful bearish attempt to eventually pull the exchange rate lower in the week ahead.
There is some tough support in the 1.27s but we think that once the pair has started moving lower bearish momentum from the trendline break and then the formation of the top will support its descent, and a break below 1.2720 will probably lead to a move down to the next level of support at 1.2620, just above the S2 monthly pivot.
Monthly picots are levels traders use to countertrend trade as they are often where bounces take place.
The bearish MACD indicator in the bottom pane, which is steadily declining, is a further supports an extension of the downtrend.
Data, Events for the US Dollar
The Dollar sold off after Friday’s disappointing Non-Farm Payrolls print which came out well below expectations at only 138k.
However, the data was not sufficiently bad to undo expectations that the Federal Reserve will raise interest rates a quarter of a percent in June and as such is unlikely to have a lasting negative impact on the Dollar, according to the consensus view.
“Will the disappointing May employment reports derail the Fed’s plan to raise interest rates in June?" ask NBF Economics. "The Fed will likely look at the bigger picture. Non-farm payrolls, despite May’s soft print, have now increased for an 80th consecutive month, an unprecedented achievement in the U.S."
Whilst a rate hike in June is still very much on the cards, expectations for rate rises further out in the future have contracted. to below 50% that the Fed will raise rates two more times in 2017.
The chance of two more rises in 2017, for example, has fallen to below 50%.
Over the next two weeks there will be a curfew on Fed officials talking about monetary policy ahead of the June FOMC, and during the period the Dollar is expected to trade with a downside bias.
“The next 2 weeks is the “quiet period” before the FOMC meeting, so there won’t be any comments from U.S. policymakers to bolster those expectations. For this reason, we expect the U.S. dollar to underperform over the next 8 days ahead of the June 14 FOMC meeting,” says BK Asset Management’s Kathy Lien.
More potential weakness for the Dollar is possible on Thursday when the former head of the FBI James Comey gives testimony to the Senate at 17.00 BST.
He will be questioned about whether President Trump asked him to stop the FBI’s Russia investigation. There is a risk of a sizeable sell-off should he continue to fuel allegations the President attempted to cover up his defence advisor Flynn’s connections with the Kremlin.
Data, Events for the Pound
The key event for Sterling is the election on Thursday. Most commentators expect a Conservative win but Labour has recovered to within 3% of the Tories in the polls from over 20% but three weeks ago and there is now a threat of there being a hung parliament.
“A failure to secure a more comfortable margin of seats (17 as of now) would weaken May’s position going into Brexit talks,” say NBF Economics Strategy.
A small majority would lead to the Pound weakening – only a majority of over 30 would help Theresa May in negotiations and support Sterling according to ING.
“We think were Theresa May's government to increase its working majority into the 30-50 seat area in Thursday's vote, GBP could enjoy a very modest bounce,” says ING’s Chris Turner.
“The main risk to GBP is an even smaller Conservative majority or a hung parliament. This would send EUR/GBP to 0.89 and USD/GBP to 1.26,” continued Turner.
Other major data releases, including PMI’s are likely to be completely overshadowed by Thursday’s election.
We will however be watching the release of Service PMI data from IHS Markit and the CIPS on Monday.
Construction and Manufacturing PMI data have both surprised to the upside and confirm that the UK economy is seeing activity accelerate in the second-quarter of 2017.
Recall the first-quarter only saw growth rise by 0.2%.
The services sector accounts for in excess of 80% of UK economic activity therefore we must see a similar beat on expectations in this sector to confirm the economy is picking up speed again.
Analysts are forecasting a reading of 55.0.
