Pound-to-Dollar Rate: Technical Forecast, Data and Events for the Week Ahead
Pound Sterling is pushing higher against the Dollar with the charts pointing to more Pound strength. But these are two politically-motivated currencies at present, so further upside cannot be guaranteed.
The Pound-to-Dollar exchange rate has finally penetrated above the major trendline at 1.3350, in a bullish sign, and is now rising in a strong uptrend which we expect to continue.
A break above the 1.3550 highs would confirm an extension up to a target at 1.3650 and the September highs.
The MACD momentum indicator is rising at the same time as price action, further corroborating upside expectations.
The extraordinary strength and steepness of the recent rally is further proof it is more likely to continue rather than reverse.
One possible caveat to our bullish view is that the highs of the last two days are very similar and they resemble a price pattern called a 'tweezer top' which is suggestive of at least a short-term reversal.
However, on its own and uncorroborated by either further weakness or loss of momentum the two-day pattern is not strong enough to change our bullish (meaning expecting higher prices) stance.
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Data and Events to Watch for the Dollar
As is the case with most currencies now, the most significant factor for the Dollar in the week ahead may be political in nature, as important new tax reform legislation moves closer to approval and the investigation into whether President Trump abused his position to obstruct the investigation into his special advisor General Flynn increases the heat on his leadership.
The new tax reform bill is one step closer to implementation after the Senate narrowly voted to approve their version of it.
This now means the two houses have voted through their own draft versions but the two versions (which are different) next need to be harmonized before they can get final approval, so although the Senate vote helped push the Dollar higher at the end of last week, we are not there yet on tax cuts.
As far as Trump's leadership goes, he is now under investigation for obstructing an investigation into whether his advisor Michael Flynn had improper links with the Russians.
It now appears Flynn did have close ties with the Russians and if it transpires Trump unlawfully obstructed the earlier investigation there is a risk he could be impeached.
Clearly this would cause huge uncertainty, probably kill tax reform dead in the water, and probably lead to a sell-off in the Dollar, although it's now rather a moot point whether Trump is a positive or negative influence on the Dollar; from being clearly beneficial at the start of his campaign, the Dollar has lost ground since he actually assumed office.
Meanwhile, on the hard data front, the big release in the coming week will be Non-Farm Payrolls, which are out on Friday.
They are expected to show a continued improvement.
"Non-farm payrolls are expected to rise by nearly 200K, which is a good number even if it is lower than the previous month but the key will be wage growth, which is expected to rebound after stagnating in October," says BK Asset Management Managing Direct Kathy Lien.
Data and Events for the Pound
The main fundamental drivers dictating price action at the moment are political in nature and focused on the twin concerns of how Brexit talks are going, and how stable the government is, and this is likely to continue in the week ahead.
The Pound rose last week on news the deadlock in Brexit negotiations had been broken, and the two sides were close to agreeing on a divorce bill, the Irish border, and citizen rights. Should this be confirmed at the mid-month European Council meeting of E.U. leaders talks will be allowed to move onto the more important subject of trade.
Yet, ultimately nothing has been confirmed and the Pound has risen on hearsay alone so there are risks of disappointment.
There is a possibility more concrete confirmation may be forthcoming in the week ahead when Theresa May visits Brussels to talk 'turkey'.
"Next week, May heads to Brussels to meet with Jean-Claude Juncker and this is her first opportunity to provide the U.K.'s divorce bill offer and to talk about their plans for the Irish border. Then on December 6th, EU ambassadors resume preparations for the summit," says forex guru Kathy Lien.
The other main political driver impacting on the Pound is the stability of the government.
From a hard-data perspective, the week opens with Construction PMI at 9.30 GMT on Monday, December 3 which will give us insights into how the sector fared in November.
The consensus amongst analysts is that it will rise to 51.0 in November, from 50.8 in October.
Services PMI is on Tuesday at the same time and is forecast to fall to 55.0 from 55.6 previously; this is the most important reading of the week as the services sector accounts for more than 80% of U.K. economic activity.
Analysts at TD Securities think the market is underestimating the sector and a pro-Sterling result beat on expectations could be delivered:
"We look for upside risks to the November Services PMI. Spillovers from optimism in the manufacturing sector (where business-to-business activity has remained strong) as well as from the rest of Europe (where the PMIs and growth are accelerating into year-end) should help support optimism in the sector."
The week ends with the Trade Balance and Industrial and Manufacturing Data out at 9.30 on Friday, December 8.
The trade deficit is expected to widen slightly to -11.5bn in October from -11.25bn and confirm the country's hefty reliance on imports remains intact; something that concerns analysts who believe the Pound could one day have to adjust materially lower in order to balance the situation.
Both Manufacturing and Industrial production are forecast to rise by 0.1% in October; disappointment here could see Sterling end the week in soft fashion.
