Pound-to-Dollar Exchange Rate: Technical Forecast, Data and Events Over the Next Five Days

GBP/USD could trade with much volatility in the week ahead due to the plethora of important releases on the calendar, whilst charts are signaling a slight downside bias.

Our technical studies of the GBP/USD exchange rate conducted ahead of the new week suggest the pair to be trading with a slightly bearish bias, with the fall from the September peak at 1.36 apparently still in progress.

The September high occurred when the exchange rate overshot the upper channel line (circled on chart).

This makes the peak look like what analysts call an 'exhaustion break' which happens when prices are rising in a channel and then suddenly accelerate higher out of the top of the channel - despite prices rallying too steeply it is actually a signal that the trend may be exhausted. 

The exhaustion break is often, therefore, a strong bearish trend reversal signal, indicating the pair may now be starting a longer-term decline.

The new bear trend, if it is that, however, has stalled and spent most of last week moving sideways as both currencies benefited from positive news which canceled gains out for each other out.

"The market is fast turning into a range play now between $1.3025/$1.3335 and the momentum indicators levelling off on the daily chart reflect this,” says Richard Perry, a technical analyst with Hantec Markets, reflecting the frustrating tone to the Pound’s recent trading patterns.

For a stronger bearish confirmation signal, we would first want to see a breakout below the lower channel line and the 1.3027 lows.

Such a move would be expected to precipitate a fall to just above the 200-day moving average (MA) at 1.2850.

The 200-day MA is expected to act as a formidable obstacle to further weakness.

MA's are dynamic levels of support and resistance which generate pockets of additional supply or demand - in this case, demand - often leading to a pull-back or correction in the dominant trend.

The MACD momentum indicator also has a bearish look and feel leading us to favour more weakness rather than strength.

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Data and Events to Watch for the Dollar

Next week is going to be a busy week for the US Dollar with four major economic news releases and events on the calendar.

The first of these is the meeting of the central bank on Wednesday 1 at 18.00 (UK) to decide interest rates.

The Federal Reserve is not expected to change rates at the meeting on Wednesday but rather to wait until the following month of December when it is widely expected to raise rates instead.

Raising rates will be positive for the Dollar as higher interest rates attract more inflows of foreign capital from international investors seeking better rates of return on their money.

Currently, expectations are firmly set for a rate hike in December but if the Fed says anything to question that in its statement, the Dollar could fall.

Inflation is still considered a little low, for example, and if this is raised as a significant concern by members of the Fed it will bring into doubt the December hike and the Dollar may weaken as a result.

Speaking of the Fed, President Donald Trump is also expected to announce the next President of the Fed before Friday, November 3.

Currently, it is a three horse race between Jerome Powell, Janet Yellen, and John Taylor.

The most positive next president for the Dollar would be Taylor who invented the 'Taylor Rule' which is a sliding indicator of what level the central bank should set interest rates depending on the level of inflation.

The Taylor Rule currently indicates interest rates should be substantially higher so if Taylor was elected the next Fed head he would be expected to raise them pretty quickly, strengthening the Dollar in the process.

Powell and Yellen already sit on the governing board so are seen as Dollar-neutral choices.

Given the substantial upside potential which already exists for the Dollar as a result of possible reforms to the tax system, and that an overly strong Dollar is not desired by the administration as it makes exports less competitive, Trump will probably not choose Taylor.

If he does, however, expect steep upside in Dollar-pairs.

The Non-Farm Payrolls labour report is also out in the coming week, on Friday, November 3.

After the shock fall in payrolls in September (-33k) which was caused by the impact of the hurricanes, the October figure is forecast to show a substantial rebound, with the consensus of economists forecast estimating a 315k rise.

Some are even more optimistic, seeing a 400k+ rebound as possible, such as analysts at investment bank TD Securities in Canada.

"We expect payrolls to give back their hurricane-induced weakness and post a 330k gain, with scope for surprise in either direction. Assuming a hurricane drag of 200-250k and an underlying trend of +175-200k, October payrolls could easily print close to +400k or higher," they said.

Events and data for the Pound: BoE Centre Stage

The big event to watch in the week ahead is the Bank of England's Inflation Report and Monetary Policy Decision, due on Thursday, November 2. 

Money markets are currently pricing in a 90% chance that the Bank will raise interest rates - so the immediate risk to Sterling is if they don't raise rates. In such a scenario expect the Pound to plummet.

Such a move would be unlikely however as the Bank's Monetary Policy Committee know their reputation is at stake; in short, there will be few who take the words of Governor Mark Carney and his lieutenants seriously should he not follow through with a 0.25% rate rise.

An interest rate rise on its own would be neutral, as it is well signposted. What matters is communication regarding future policy moves - is there going to be a follow-up rate rise in 2018 or not? If yes, this would be positive for Sterling, if no, this would be bearish.

Financial markets are now pricing in a rise in 2018 which is more in line with Carney's view and so he may express satisfaction that they are correctly pricing probabilities.

"The picture is still cloudy enough for some UK rate-setters to question the need for immediate action. Nevertheless, we expect the Committee to move ahead with a 0.25% increase," says Lloyds Commercial Banking's Senior Economist Rhys Herbert. "With regard to the Bank’s forward guidance, of most interest will be whether Carney reiterates his previous assertion that markets are underestimating the potential for interest rate rises."

Yet at the same time, Carney is still expected to emphasise that interest rate rises are likely to be "gradual".

The big debate for Sterling going forward is whether the interest rate is a once-and-done affair or the start of a new cycle.

Whichever side you fall on is likely to determine whether you are bullish, or bearish on Sterling.

“For investors, the key question is whether or not there will be further hikes next year. Market expectations are for at least one further 25bp hike next year. In contrast, we think the MPC will be making a mistake by hiking now, and that they will recognize this in the coming months,” says Daniel Vernazza, UK economist at UniCredit.

On the other side of the coin is the view that we are at the start of a new cycle of rate rises.

“It is not clear to us that UK growth is about to falter suddenly. There may be further Brexit negotiation uncertainty, but there is arguably a lot of it already. Instead, we prefer to trade with conviction the idea that this is not a policy mistake and that the BoE is on a hiking cycle,” says Jordan Rochester at Nomura.

As a result, Rochester is betting the Pound-to-Euro exchange rate will rise towards 1.15 near-term.
PMIs

Another major release for the Pound in the week ahead is the results of the October Purchasing Manager surveys for Manufacturing, Construction, and Services.

These are out at 9.30 on Wednesday 1, Thursday 2 and Friday 3 respectively.

Manufacturing it forecast to fall to 55.8 from 55.9 by the consensus of economists, although, some such as Lloyds's Herbert see an even lower result as likely due to the decline in the CBI Industrial Trends survey last week.

However, this is with the proviso that the Manufacturing PMI has been overall in an upbeat trend.

Lloyds Bank's Herbert is more constructive about Services PMI which he expects to come out at 54.0, however, the consensus expectation is for a fall to 53.2 from 53.6.

Finally, in the coming week Brexit Minister David Davis is to be questioned on the progress of negotiations on Tuesday at 16.05 (UK), and clearly how he answers is likely to impact the Pound given how hypersensitive the currency is to Brexit headlines.

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