Pound Sterling v Dollar: Forecast for the Next Five Days

The Pound to Dollar exchange rate (GBP/USD) has pulled back over recent weeks after peaking at 1.3260 at the beginning of August.

It is currently trading back down at 1.2934 and although the medium-term trend is still technically up, the pair looks vulnerable to further downside.

There is support from the 50-day moving average (MA) situated just below the current level, and although the 50-day  can be a formidable support level, we see chance it could be breached in this instant. 

An a-b-c correction is probably unfolding lower, with an end target at 1.2800, assuming wave b-c is roughly equal to a-b.

The very short-term trend, as highlighted on the four hour chart below, is now bearish too, due to the sequence of lower highs and lower lows.

We would view a break below the 1.2900 level as significant and as likely to confirm a continuation down to the next target at 1.2800.

Politics: How Will Sterling React to Cabinet Agreement on Transition Period

Ahead of the new trading week we get news that the UK cabinet might be settling into a unified position on the way forward regarding Brexit.

Cabinet heavy-weights Philip Hammond and Liam Fox have come together to declare the UK will leave the single market and customs union when Brexit happens in March 2019. However, both agree that a transitional period is required to ensure disruption to business and citizens is minimised.

The Pound has struggled of late with markets and businesses looking at splits within the UK's leadership as to how to proceed with Brexit. The lack of unity has had many analysts concerned that a disruptive Brexit might occur - which is seen by many as a worst-case scenario for Sterling.

In an article written for the Telegraph, the ministers - representing the Remain and Leave wings of the Tory party -  say this will be "time limited" and designed to avoid a "cliff edge" that could damage British business.

With Sterling looking heavily oversold it could be that Sterling reacts positively to such overtures. Monday's intitial trade will therefore be of interest to us as it will confirm whether or not markets are willing to take a more positive view on Sterling.

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Data for the US Dollar

Supporting the idea of more downside on the charts are valuation models showing the Dollar is extremely undervalued, and the currency seems due a come-back.

Positioning data, which shows the number of futures contracts held by large speculators shows an extreme predominance of bearish bets on the Dollar, suggesting the 'elastic is stretched' to the downside and the currency is due an upside revision.

One major driver for the Dollar in the week ahead is likely to be the course of geopolitical tension between the US and North  Korea, which is probably - although by no means definately - likely to weaken the Dollar.

In disucssing how a possible war between the two nations would impact on the Dollar, Kathy Lien notes that:

"Taking a look at some of the major military conflicts over the last three decades, the Dollar suffers greatly when there is a war."

As far as hard data goes, the first major release is Retail Sales, on Tuesday at 13.30 BST, which is expected to show a 0.4% rise in July, from -0.2% previously.

The FOMC meeting minutes are out on Wednesday at 19.00 and could help determine the monetary policy outlook for the currency.

Building Permits and Housing Starts are out on Thursday at 13.30.

The Philidelphia Fed Manufacturing Index is out at 13.30 on Thursday, and is forecast to show an 18.0 result for August compared to 19.50 previously.

Data for the Pound

Tuesday’s CPI release is the main event in the coming week for Sterling.

Consumer Price Inflation is expected to show a 2.7% rise in July, from 2.6% previously, when it is released at 9.30 on Tuesday. 

Producer Prices which are also expected to be released at the same time are forecast to show a rise of 0.5% in July - for input prices, which measures the cost of materials used in production, rather than the wholesale price of the finished article.

Both headline and core inflation (core measures inflation with volatile food and energy prices removed) have risen since the pound fell sharply after the referendum last year. 

Core is forecast to come out at 2.5% from 2.4% previously, compared to a year ago.

Employment data, including the Unemployment rate and Average Earnings are scheduled for release on Wednesday at 9.30 BST.

Unemployment is forecast to remain at 4.5% and earnings plus bonus to show a 1.8% rise, year-on-year.

“Earnings growth slowed to the lowest seen since late-2014 in May, falling further behind inflation. Recent recruitment survey data, however, has shown a combination of demand for staff and deteriorating candidate available leading to stronger pay growth.

“Overall price pressures also picked up in July alongside an increase in the rate of job creation, according to the latest PMI data,” said Bernard Aw, chief economist at Markit IHS. 

Thursday August 17 sees the release of Retail Sales, which is forecast to rise by 2.9% in July compared to July in 2016.

The market will be expecting Retail Sales to be weak, so a strong result will be a surprise and probably provide a catalyst for a recovery in Sterling.