5-Day Pound-to-Dollar Rate Forecast: Technical Forecast Sees Downside Bias Over Next Five Days

Our technical studies suggest the GBP/USD exchange rate is at risk of a downside break, in line with a prior trend of weakness but much will depend on the outcome of this week's round of Brexit negotiations.

The Pound-to-Dollar exchange rate is currently trading in a sideways rangebound market, however a downside breakout from the range is more likely, in a continuation of the short-term move down prior to the formation of the range.

A steep sell-off following the Bank of England meeting on Thursday, November 2 took the exchange rate right down to the floor of the range - shown on the chart below as the bottom of two turquoise lines:

A break below the October lows would a confirm a breakout from the range and a continuation down to the next target at the S2 monthly pivot at 1.2865 - a formidable obstacle to further downside.

Monthly pivots are obstacles because traders often use them to trade against the direction of the trend in an effort to profit from the pull-backs which often occur after price touches them.

The normal method to calculate the distance which the exchange rate is forecast to go following a breakout from a range is to extrapolate the height of the range at its widest down from the floor, and although this would result in a lower level on GBP/USD, the occurrence of the pivot and the 200-day in such close proximity indicates a zone at which prices are almost certain to stall, if not reverse.

The MACD momentum indicator is also looking bearish after pushing below the zero-line, further allying itself to a bearish forecast.

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Events and Data to Watch for the Dollar this Week

It's a quiet week for the Dollar after all the drama of the previous week, with the only real tier one release Michigan Consumer Sentiment, for November, out on Friday, November 11 at 15.00 GMT.

Michigan Sentiment is expected to rise to 90.9 (from 90.5) for the expectations component and 101.9 (from 100.7) for the current situation.

The other major Dollar driver investors will be focusing on in the week ahead is the progress of the Tax Reform bill a blueprint of which was drawn up and published last Thursday.

Current expectations are not supportive of an optimistic outlook for the bill which critics say contains too many contentious policies to have any hope of being passed by Congress into law. 

In the coming week, the market will be closely watching how debates around the final content of the bill evolve.

Concerning timing, analysts at TD Securities have been watching events unfold and are of the view it will not get voted through until next year:

"The Senate plans to release their version this week, with the goal of passage by Thanksgiving. Areas of contention, pushback from industry groups and questionable deficit impacts will keep uncertainty high for now. We continue to believe tax reform is more likely to be passed early next year."

If correct this would be bearish for the Dollar which would be expected to benefit from Trump's tax reform plans; any delay and watering-down of his plans would therefore understandably weigh.

Events and Data for the Pound in the Coming Week

Above: Michel Barnier and David Davis. (C) European Commission.

Last week saw the Bank of England take the momentous step to raise interest rates for the first time in 10-years.

Yet no sooner had the rate hike been announced did the market move onto the next topic of discussion, which is whether or not the hike was a one-off or a part of a series.

The main determining factor appears to be Brexit uncertainty - if talks go smoothly the BoE is more likely to raise rates again - if not then they will probably err on the side of caution and leave the one rise until a clearer picture of what post-Brexit Britain will be like emerges.

Remember the rule of thumb is higher interest rates = a stronger Pound.

Governor @bankofengland Mark Carney explains how the "Brexit effect" has limited the strength of economic growth. #Peston pic.twitter.com/yI0a2U5lCS

— Peston on Sunday (@pestononsunday) November 5, 2017

"We agree that a deal is the most likely outcome, and based on this we believe that market expectations for a cumulative 0.5% of additional interest rate rises by mid-2020 look low. Rather we think the MPC would like to follow a path similar to that of the Federal Reserve, which has raised rates by a cumulative 0.75% since its initial hike in December 2015," says Pimco Analyst Mike Amey.

Brexit negotiations commence once again in the coming week with all eyes turning to Friday's press conference to be hosted by the UK's David Davis and the EU's Michel Barnier for clues on progress.

Markets will want to see signs of progress that will allow the progression of talks from issues surrounding the divorce to that of trade. Of particular concern is the securing of a transitional deal, widely expected to last two years.

Businesses want certainty and the transitional period will be critical to providing the stability required to make investment decisions.

“Given the Government’s ambitious timetable, to agree on a transitional period early next year and the future relationship altogether by next October, it is crucial for the second phase of talks to start in January,” says Andrew Wishart, UK Economist with Capital Economics.

All in all, this is to say that in the week ahead news about Brexit will remain a high priority for currency dealers.

As far as the hard-data front goes, it is a relatively quiet week with no tier one releases on the radar.

The first release is the BRC Retail Sales Monitor released just after midnight on Tuesday, November 7.

This will provide an up-to-date snapshot of the most recent retail sales activity.

Next, we have Halifax House Prices out at 08.30 on Tuesday and is followed by the House Price Balance from the Royal Institute of Chartered Surveyors, just after midnight on Wednesday, November 8.

On Friday Industrial and Manufacturing Production data for September is released at 9.30, with the former expected to come out at 0.3% versus 0.2% previously, and later suggesting a 0.3% versus 0.4% previously.

The Trade Balance is released at the same time and is expected to show the deficit narrow to -12.8bn from over -14bn previously.