GBP/USD Rate's Trend is Down, but with Some Provisos
The big event for the British Pound in the coming week is the vote in parliament on the Queen’s speech which Theresa May’s government needs to pass, in order to maintain power.
If Theresa May's conservatives fail to win the vote there is the chance the Pound would weaken back down to at least as low as its 1.2587 lows amidst heightened uncertainty.
Last week the Pound to Dollar rate reached a new 2017 low of 1.2587 before recovering for the next three days, to end Friday back up at 1.2718.
The short-term trend is technically down but with some provisos.
The three-day long recovery is a bullish sign – markets often rise for two straight days but not three, such a recovery is rare in a down-trending market and is often a bullish reversal sign.
The break below the 1.2632 lows was key in establishing a bearish bias as it reversed the sequence of peaks and troughs lower, however, the exchange rate has failed to follow-through since the break which is not an encouraging sign for bears.
The 200-day moving average (MA) lies just below the 1.2587 lows at 1.2551 and it is likely to present a tough obstacle to further efforts by bears to push the exchange rate lower.
The 200-day MA isn’t just a determinant of long-term value but also a level of support or resistance in itself.
Not far below the 200-day are two trendlines: A and B, which are also likely to present strong support levels at which the exchange rate is likely to stall or even rotate higher.
Nevertheless, there is insufficient evidence yet to suggest the trend has shifted from down to up, so we continue to see a possibility of more downside.
The MACD is below the zero-line and thus signalling the trend is down.
A break below the 1.2587 lows would be required to confirm a continuation lower, although the 200-day is likely to provide the first target not far below at 1.2555.
Data and Events for the Dollar
The US Federal Reserve’s preferred gauge of inflation: Personal Consumption Expenditure (PCE), is scheduled to be released at 13.30 BST on Friday, June 30, and is likely to be the main data event for the Dollar in the week ahead.
The market has turned a little doubtful over whether the Fed is going to continue raising interest rates recently and the PCE release will help to provide perspective on these misgivings.
If the PCE comes out disappointingly low then this could fuel doubts about Fed policy, and lead to a sell-off in the Dollar.
The Dollar will move in correlation with inflation and interest rate expectations, rising if they are higher and falling if they are lower, since higher interest rates tend to attract more foreign capital, and vice versa.
The consensus analyst expectation is for PCE(Core) to slow slightly in May to 1.4% from 1.5% in May 2016, and to rise 0.1% from 0.2% on a monthly basis.
“We look for headline and core PCE inflation to slip further, with the core index falling to 1.4% y/y due to several one-offs (cellphone services, apparel) along with continued weakness in vehicle and healthcare services prices. Spending and income should be solid and supportive of robust real PCE growth near 3%. But the weak core inflation print should ultimately drive a dovish market response, reinforcing markets' skepticism over future rate hikes,” said Canadian IB TD Securities.
Beyond that there is housing data, commentary from Fed officials and the Michigan Sentiment Gauge in the week ahead.
Politics Central for Pound this Week
On the agenda for Sterling this week:
- Ongoing debate around of Brexit negotiations
- The Government’s alliance with the DUP to allow it to govern
- The debate on the Queen’s Speech, with a vote expected on Thursday
- The government is also expected to present details of proposals on rights for EU citizens after Brexit on Monday.
One of the main events for Sterling in the week ahead is the voting of parliament on the Queen’s speech, which is to be held on Thursday 29.
The event should pass by without little hitch though owing to the successful signing of a pact between the DUP and Conservative parties.
In exchange for a number of key policy pledges and spending, the DUP will support the Government's agenda in Parliament.
This will allow May to Govern effectively and removes a key piece of uncertainty in the UK political sphere. .
The only other events of any note is Bank of England Governor Mark Carney's appearances on Tuesday at 11.00 BST and Wednesday 14.30 at the ECB's central banker's forum.
Markets will be looking for any hints that he supports raising interest rates in the UK, as does the Bank's Chief Economist Andy Haldane.
The Pound dropped last week when Carney said he would not support a rate rise only to rally the following day when Haldane said he would support such a move.
If those looking to raise rates win the argument, we would see another pillar underneath Sterling fall in place.