Pound-to-Dollar Technical Forecast, News, and Events for the Next Five Days

Pound Sterling's run higher against the US Dollar is looking increasingly entrenched but we will be keeping an eye on the US Federal Reserve which is due to update markets on latest monetary policy decisions mid-week.

The Pound-to-Dollar exchaneg rate achieved fresh 15-month hgihs thanks to the impetus provided by a shift in messaging regarding future interest rate rises from the Bank of England which said it was seriously considering raising interest rates at its September meeting.

The rally to the new high at 1.3615 was initially triggered by the surge seen last Tuesday after the release of inflation data, which showed a 2.9% rise year-on-year, which was an above-expectations result, and was the spark which initiated raised hopes of a rate hike.

Our studies suggest the GBP/USD is likely to continue its trend higher in the coming week although the Federal Reserve rate meeting on Wednesday (FOMC) could lead to increased volatility if the Fed radically changes its outlook for the future trajectory of interest rates, although we will discuss that in more detail later in the article.

Firstly looking at the charts we note that the uptrend is continuing to rise strongly and has broken above a major trendline ('A'), as well as both its 50 and 200-day moving averages, which taken together are all bullish indicators.

The MACD momentum indicator has risen above the zero-line officially marking a change of trend.

When trends are this powerful they normally just continue rising.

There is support from the R2 monthly pivot at 1.3500 and if the exchange rate pulls-back it will probably find support at that level, before continuing higher.

A break above the 1.3617 highs would lead to a continuation up to the next target at 1.3700, which is a round-number barrier.

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Federal Reserve Dominates Calendar for the Dollar

The main data event for the Dollar will likely be the meeting of the Federal Reserve Open Markets Committee (FOMC) on Wednesday at 19.00 BST.

Analysts at TD Securities expect the Fed to lower its longer-run rate expectations, which would be negative for the Dollar, although they offset this to a certain extent by predicting the press conference could be "cautiously upbeat".

The Fed is not expected to change the interest rate at the meeting but they are expected to institute a balance sheet reduction plan, or 'run-off' as it is known, which amounts to a reduction in the reinvestment of principle from its bonds maturing.

In the same way, as QE was 'tapered' gradually so the balance sheet run-off, in terms of a shifting cap on reinvestment, will also be tapered.

This means the rate and volume of reinvestment-reduction could impact on the outlook for the Dollar, both in relation to how this impacts on commercial rates and Dollar scarcity.

As has been noted by analyst Martin Enlund at Nordea Bank, the Fed balance sheet reduction plan is one factor which will make Dollars more scarce, because the Fed will not be buying new assets from financial institutions thus providing them with liquidity, so there will be less Dollars in circulation, and Dollars will therefore rise in value.

Those watching the Dollar should know this - expectations regarding the Federal Reserve are incredibly soft at the moment and the risks are skewed to a pro-Dollar should any hint of 'hawkishness' come out of the Fed.

On the data front, we have a number of key housing statistics due for release.

These are mainly out on Tuesday, September 19 at 13.30 when Building Permits and Housing Starts are released, but also on Wednesday when Existing Home Sales are released at 15.00.

Overall analysts appear relatively upbeat about the likely outcome of the figures.

Flash September PMI data, out on Friday at 14.45, will be positive in gauging the impact and economic effects of hurricanes' Harvey and Irma, which could also, "provide further clues as to the direction of future Fed policy," according to IHS Markit's principle economist, Bernard Aw.

"The pre-Harvey/Irma survey data (August) were pointing to GDP rising at an annualised rate of 3.5% in the third quarter, but growth could struggle to rise much over 2%," says Aw.

Data, and Events to Watch for the Pound

The Bank of England's Mark Carney will be speaking at 16.00 on Monday, September 16, in Washington DC.

With Bank of England policy being the predominant driver of Sterling at present, the comments will be closely followed for any further clarification of policy trajectory.

He is unlikely to deliver a radically different message with regards to UK monetary policy to the message which came out at Thursday's policy meeting. He will also avoid contradicting his comments made to a press pool hours after the event in which he indicated he is part of that group of policy-makers that believe an interest rate rise in the near-future is necessary.

There is the chance that he might push back against the recent market assumption that rates will be raised in November which would be negative for the Pound; but such a move would be too risky at this stage as it would certainly cloud the picture with regards to monetary policy.

The Bank's message must be clear and unanimous in scope at this juncture, and we doubt Carney would compromise with any message other than interest rates are to rise in the near-future.

Data-wise, retail sales out on Wednesday, September 20 at 09.30 BST, will provide fresh insights on consumption trends. 

It is forecast to rise 1.1% year-on-year in August (from 1.3% previously) and Core is expected to rise 1.3% from 1.5% a year ago.

The recent rise in the number of people in work, "should provide some support to consumer spending, with the jobless rate falling to its lowest since 1975," said IHS Markit's Principle Economist Bernard Aw.

"However, wage growth remains stubbornly low despite the hiring surge, which could continue to weigh on household spending," he added.

A beat on expectation should reinforce the fresh positive stance adopted by markets with regards to Sterling's outlook.

IHS Markit's Household Finance Index, a survey of house holders finances, out in the week ahead, could also be useful in measuring the pressure on consumers.

On the political front, all eyes will be on Prime Minister Theresa May when she delivers a major speech on the UK's Brexit stance in Florence, Italy on Friday 22.

The speech will be keenly watched by markets for signs that the UK will yield further concessions, or even creative ideas, to push Brexit talks forward.

Such an outcome would certainly be positive for Sterling which is remains weighed down by the uncertainty surrounding the Brexit process.

The speech will also provide domestic political intrigue in that the speech will be made nearly a week after Foreign Secretary Boris Johnson wrote a lengthy article for the Telegraph newspaper in which he laid out his vision for Brexit.

Some have interepreted the speech as a direct challenge on May's leadership.

We doubt this to be the case and would suggest it is rather a rallying call to the British public at a time when confidence regarding the Brexit process is low.

Indeed, a leadership challenge opens the door to fresh elections which in turn raises the spectre of a Labour party victory and the opening of a pandora's box of market-negative policies which bode ill for Sterling's long-term valuation.