Pound-to-Dollar: Week-Ahead Technical Forecast, Data and Events to Watch

The passage of Tax Reforms in the US and Brexit in the UK could be the main factors influencing the Pound-to-Dollar in the week ahead, whilst charts tell a story of Sterling strength and Dollar weakness.

The Pound-to-Dollar exchange rate's chart is looking ever more bullish with each passing day.

It has broken above our previous target at 1.3350 and is on its way up to our target at 1.3440 (revised down from 1.3445).

It has risen up to the major trendline (black trendline A on the chart below), and it will need to break through this major obstacle to get to its target.

This is a major, long-term, trendline drawn from the 2014 highs as shown on the monthly chart below. There is an alternative place the trendline could be drawn - technical analysis is not an exact science - which is also valid, and I have also drawn that on in red (labeled 'Alternative').

Using the alternative produces a much more bullish picture as it has already been breached.

The black trendline remains intact but we expect the exchange rate to break above it and move higher towards its target at 1.3440.

A clearance of the 1.3361 highs would provide confirmation of  a continuation to the aforesaid target.

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Data and Events for the Dollar

Progress on Tax reform could be the biggest mover of the Dollar in the week ahead.

If the reforms look like they are going to get approved it will probably be positive for the Dollar, as they are expected to increase growth, spending, inflation, and interest rates - with the last pushing up the Dollar.

Higher inflation leads to the US Federal Reserve raising interest rates in order to bring inflation back down, and this increases the attractiveness of the US as a place for international investors to park their money; the higher inflows increase demand for the buck, which appreciates.  

But the going is not expected to be smooth for Tax reform legislation with its biggest test ahead and the voting of the bill through the Senate.

"It is unclear whether the Senate is ready to vote on the tax bill next week or if it will be pushed out further. While tax reform seems inevitable, the near term uncertainty will not be good for the currency," says BK Asset Management Managing Director, Kathy Lien.

Speeches by Yellen and Powell may also be important. Yellen appears before the Joint Economic Committee while Powell before the Senate Banking Committee for his nominee hearing.

According to TD Securities, Powell's comments (Tuesday at 14.45 GMT) are only likely to move markets if he, "says should something unexpected or some Republicans surprise by hinting at opposition."

Yet TD see little chance of volatility from Yellen (Wednesday 15.00) Dudley (Tuesday 14.15) or Harker (Tuesday 15.15) who are all likely to, "stick to the gradualist script."

As far as hard data goes, the most significant release will be  Personal Consumption Expenditure (PCE), on Thursday, November 30 at 13.30, as it is the Federal Reserve's preferred gauge of inflation and influences their decision making on interest rates.

"Core PCE inflation should firm to 1.4% annually, reflecting a 0.2% m/m increase that is likely to underperform the previously-reported core CPI print," says TD Securities. 

Data and Events for the Pound

Much like the many-headed Hydra, a mythical creature that Hercules fought, which regrew two new heads for every one he cut off, so the Brexit negotiations keep growing new problems for Prime Minister Theresa May just as she has seemingly dealt with one.

Just after appearing to agree on a divorce bill, a new problem has presented itself in the form of the border between N.Ireland and the Republic of Ireland, which the Irish now making it a condition of Brexit that the border is kept invisible because of the high volume of trade across it.

A hard Brexit, however, would lead to the building of a more physical border, negatively impacting on trade.

A senior Irish diplomat in the EU has said it would really be better all round if the UK remained in the trade and customs union - or at least the customs union as then there would be no border issue.

He warned the UK people not to put too much faith in future free trade agreements as even the best of these, would "fall far short of being in the single market."

This is a further argument for a 'soft' Brexit but whether the government decided to head his advice is questionable.

One solution would be to essentially keep Northern Ireland in the EU (exempting it from Brexit) so that the border could be left open, however, this idea has been met with firm resistance from the DUP, Theresa May's partners in government, and her only key to a parliamentary majority.

With no clear solution, the Irish border issue is now likely to further delay the onset of the next stage of Brexit talks, and Theresa May has only got until December 4 to come up with a solution.

Clearly, how the Ireland issue evolves in the coming week, will probable be a factor impacting on Sterling.

But as if this was not bad enough, documents leaked to the Independent over the last few days, now also indicate that EU negotiators are preparing to only make a 2-year transition period conditional on the UK having to accept any new rules or laws made in Brussels during that period - and accept them, moreover, without having any say in their formulation.

This clause is expected to be intolerable to certain Brexit hardliners in the cabinet such as Liam Fox, Boris Johnson and Micheal Gove who think all cross-migration of rules from the EU to the Uk should end in 2019 on the official Brexit deadline, and could further cleave the government apart on the issue.

More political instability and infighting would certainly weaken Sterling, so it will be interesting to see whether this new condition is verified in the coming week - if it is, then expect more downside for the Pound.

From a hard data perspective, the main release in the coming week will be Manufacturing PMI on Friday, December 1, at 9.00 GMT, which is forecast to show an uptick to 56.5 from 56.3 previously.

Canadian investment bank TD Securities expect the result to be even higher as Eurozone growth spills-over into the UK:

"While strength in its euro-area counterparts is being driven by broad-based growth there, spillovers to UK businesses should nevertheless give the measure a lift, and November's CBI indicators seem to suggest continued healthy growth by firms," they said in a week ahead round robin.