GBP/USD Rate: Technical Forecast, News and Data for the Week Ahead
A shift in the Brexit debate could have the potential to support a recovery in Sterling in the week ahead.
The new softer position adopted by the opposition Labour party could put pressure on the government to likewise shift towards a less fractious Brexit.
Meanwhile, our technical studies show the chart dynamics of the Pound to Dollar exchange rate reflect a potential for a more positive outlook having just bounced off a major trendline.
A cycle-low may well have been reached and GBP/USD looks poised now to move higher on the back of renewed Sterling strength.
Whilst it is still too early to say for sure we see a bias to more upside in the short-term, given the strength of the rebound so far.
The pair has formed a three-wave abc pattern on the four hour chart, which could either be a correction of the dominant short-term downtrend or the start of a new uptrend.
The steepness of the b-c wave, however, makes us think the pattern is the beginning of a new uptrending market wave rather than a correction which will roll-over and continue lower.
We see a break above the 1.2889 highs as supplying confirmation of more upside, to an initial target at 1.2915.
This would also change the sequence of lower highs and lower lows and provide evidence of a change in trend.
There is a cluster of resistance levels at 1.2940 including the 50-day moving average and the R1 monthly pivot which are likely to provide a major obstacle to any extension higher.
The MACD is at the level of the zero-line on the 4-hour chart and if it moves above it will officially signal a change in the short-term trend.
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Data and Events for the Dollar
The Dollar's weakness following the Jackson Hole symposium came as a result of Janet Yellen not mentioning anything about the Fed cutting its balance sheet or raising interest rates, however, her comments were not seen as negative and may even have been construed as positive, since she highlighted the continued improvement in the economy.
It is possible, therefore, that the Dollar's bout of weakness may be shortlived as there is little fundamental content underpinning it.
The main release for the US Dollar in the week ahead, however, is probably likely to be Non-Farm Payrolls on Friday, September 1, at 13.30 BST.
Payrolls are expected to rise by 180k in August versus 209k previously.
Average Hourly Earnings, released a the same time, are expected to have rise by 0.2% in August and the Unemployment Rate is forecast to remain at 4.3%.
According to investment bank TD Securities, "The combination of near-consensus job growth and an on-consensus pickup in wages argues for a hawkish reaction, given how much wages have disappointed the last four months."
Other significant data for the Dollar, includes Consumer Confidence at 15.00 on Tuesday 29, Q2 GDP at 13.30 on Wednesday, Personal Consumption Expenditure on Thursday at 13.30, which is important because it is the Fed's favoured gauge of inflation; and finally Michigan Sentiment on Friday at 15.00.
Data and Events for the Pound
It is a thin week for UK data with the only releases of any significance Consumer Confidence on Thursday 31 at 12.05 BST, and Manufacturing PMI, on Friday, September 1 at 9.30, although analysts do not see either as being market moving.
House Price data from Nationwide will also be released at 7.00 on Tuesday, August 29.
But it will be Brexit negotiations that matter for Sterling in the coming week as the EU and UK sit down for their third round of talks.
"The central bank’s ongoing concerns about Brexit, uneven data and the prospect of a stronger U.S. Dollar, kept Sterling under pressure and we believe these same factors will lead to the currency’s continued underperformance this coming week," says BK Asset Management's Kathy Lien.
"The last we heard, Brexit talks could be delayed until December – 2 months later than planned as disagreements have caused the government to hope for a change in the German government. Germany holds federal elections at the end of September but Angela Merkel is widely expected to win," adds Lien.
But there is a risk markets approach the Pound in too negative a fashion ahead of the next round of talks, which commence on Monday, August 28.
The U.K. government is sticking to its view that they should not pay a penny more than their legal obligations according to foreign minister Boris Johnson. However, Johnson has also made clear that the UK accepts it has obligations with regards to paying a settlement fee.
So this could be constructive in that the Government is showing some unity of purpose and are notably softer in rhetoric.
News that the opposition Labour party appear to be shifting to a much softer version of Brexit, however, could offset the slide in Sterling if it pressures the Government to adopt a similar stance.
Shadow minister for Brexit, Kier Starmer, has set out Labour's revised position in an Observer article this weekend, which has the potential to rattle markets.
Labour's new position is that the UK will keep membership of the Economic and Customs union - but not the political union - during a handover period of 4 years after the official exit date in 2019, with a view to potentially retaining some aspects of membership forever, and negotiating out those which are less desirable.
With markets so negative on Sterling we believe the risks are now to the upside. Specifically, if EU Brexit negotiator Chief Michel Barnier were to say at the conclusion of this week's negotiations that progress has been made, the Pound could pop.
The UK Government's position papers, released over recent weeks, should provide welcome clarity for negotiations. If some good progress can be made over coming days the oversold Sterling might find the fundamental trigger to a recovery.